What is an Equity Share? Meaning, Features & Types

An equity share represents ownership in a company. Shareholders own a portion of the company through these shares.

To understand how this works in practice, let's look at a hypothetical example. Reliance Industries has 10,000 crore equity shares outstanding. Each share costs ₹2,500 in the market. 

Now, imagine Rahul decides to invest in this company. He buys 100 shares for ₹2,50,000 total investment. Rahul now owns 100 shares of Reliance Industries. The formula to calculate the ownership is: (Number of shares owned ÷ Total shares outstanding) × 100. His ownership percentage equals 0.000001% of the entire company. 

As a shareholder, Rahul enjoys two main benefits. First, when Reliance declares a ₹10 dividend per share, he receives ₹1,000. Second, if the share price rises to ₹2,700, his investment grows to ₹2,70,000, giving him a ₹20,000 profit. 

Equity Share Investment Table:
 

Note: Dividend calculation: Each investor received ₹10 per share as declared by Reliance Industries (Number of shares × ₹10 per share = Total dividend received)

Capital gain calculation: Current value - Total investment = Capital gain

Current share price: ₹2,700 per share

This blog explains how equity shares work and shows you the money you can make from them. The table shows how different investors benefit from equity shares. Higher shareholding means higher dividend income and returns.

1. Understanding Equity Shares

Equity shares give investors ownership rights in companies. Each share represents a small portion of the business. Companies issue equity shares to raise money for expansion. Investors buy these shares expecting profits and dividends. Share prices change based on company performance and market conditions.

Consider Tata Motors' equity share structure as an example. Tata Motors has 50 crore equity shares in circulation. Each share trades at ₹800 on the stock exchange. Meera buys 500 shares for ₹4,00,000 total investment. She becomes a part-owner of the Tata Motors company. 

Her voting rights depend on her shareholding percentage. When Tata Motors performs well, share prices increase significantly.

Company Comparison Table:
 

Key Terms: 
 

• Dividend Yield: This indicates how much money the company pays you each year in relation to the price you paid for the share. A higher percentage means you get more money back from your investment.
   
• P/E Ratio: This compares how much you pay for a share against how much profit the company makes per share. A lower number means the share is cheaper to buy.

Different companies offer varying returns and growth potential. Investors choose shares based on their risk appetite and expectations.

2. Key Features of Equity Shares

Equity shares carry several important features and investor benefits. Shareholders enjoy voting rights in company decisions and policies. They receive dividends when companies declare profits and distributions. Capital appreciation offers potential for long-term wealth creation. However, equity investments also carry market risks and volatility.

Wipro's equity share features demonstrate these characteristics perfectly. Wipro has 30 crore equity shares outstanding currently. Each share costs ₹450 in today's market conditions. Rajesh invests ₹2,25,000 buying 500 Wipro shares. He gains voting rights in annual shareholder meetings. Wipro pays ₹2 dividend per share annually to shareholders.

Key Terms:
 

• Capital Gains: This is the profit you make when you sell your shares for more money than you originally paid for them.
   
• Liquidity: This means how easily you can buy or sell your shares without waiting for a long time or losing money in the process.

Rajesh's Investment Analysis:
 

• Initial investment: ₹2,25,000 (500 shares × ₹450)
   
• Annual dividend: ₹1,000 (500 shares × ₹2)
   
• Current value: ₹2,50,000 (500 shares × ₹500)
   
• Total return: ₹26,000 (₹25,000 capital gain + ₹1,000 dividend)

These features make equity shares attractive for long-term investors seeking growth opportunities.

3. Types of Equity Shares

Companies issue different types of equity shares for various purposes. Ordinary shares form the most common type of equity. Preference shares offer fixed dividends before ordinary shareholders. Bonus shares come free to existing shareholders periodically. Rights shares allow current shareholders to buy additional shares.

Hindustan Unilever demonstrates various equity share types. HUL has 200 crore ordinary equity shares outstanding. Each ordinary share trades at ₹2,400 currently. Priya owns 100 ordinary shares worth ₹2,40,000. 

HUL announces 1:1 bonus shares to existing shareholders. Priya receives 100 additional bonus shares without payment. Her total holding becomes 200 shares worth ₹4,80,000.

Understanding Bonus Shares: HUL announces a 1:1 bonus share issue to existing shareholders. This means Priya receives 100 additional bonus shares without making any payment. However, it is important to understand that bonus shares increase the quantity but not the immediate value of her investment.

When bonus shares are issued, the share price typically adjusts downward to reflect the increased number of shares. Therefore, Priya's total holding becomes 200 shares, but the value per share drops to approximately ₹1,200, keeping her total investment value at ₹2,40,000 initially. The value only increases if the market price rises above this adjusted level.

Share Type Breakdown:
 

Share Distribution Timeline:
 

• January: 100 ordinary shares purchased
   
• March: 100 bonus shares received free
   
• June: 50 rights shares bought at a discount
   
• Current total: 250 shares worth ₹5,80,000

Different share types provide flexibility for both companies and investors.

4. Rights and Benefits

Equity shareholders enjoy numerous rights and benefits from ownership. They vote on important company decisions and policies. Shareholders receive dividend payments when companies earn profits. They gain from capital appreciation as share prices rise. Bonus shares and rights issues provide additional benefits periodically.

Asian Paints shareholders experience these benefits in practice. Asian Paints has 80 crore equity shares in circulation. Each share costs ₹3,200 in the current market. Suresh buys 200 shares for ₹6,40,000 total investment. He attends annual general meetings and votes. 

Asian Paints declares a ₹15 dividend per share annually. Suresh receives ₹3,000 dividend income each year.

Explanation for Calculation:
 

• Dividend Value: 200 shares × ₹15 per share = ₹3,000 annually
   
• Capital Gains: Assumes 10% price growth on ₹6,40,000 portfolio value = ₹64,000
   
• Bonus Shares: 1:5 ratio means 40 additional free shares (200÷5) worth ₹1,28,000 at current market price
   
• Right Issue: 20% discount on purchasing additional shares. If Suresh buys 40 additional shares at market price (₹3,200 each), he pays ₹1,28,000. With rights issue at 20% discount (₹2,560 per share), he pays ₹1,02,400, saving ₹25,600

Suresh's Annual Returns:
 

• Dividend income: ₹3,000
   
• Capital appreciation: ₹64,000 (10% growth)
   
• Total annual return: ₹67,000
   
• Return percentage: 10.47%

These rights make equity shares attractive for long-term wealth building.

5. Risks and Considerations

Equity shares carry significant risks alongside potential rewards. Market volatility affects share prices daily without warning. Company performance directly impacts share values and dividends. Economic conditions influence overall stock market movements. Investors may lose money if share prices fall.

Bajaj Auto's share performance illustrates these risks clearly. Bajaj Auto has 25 crore equity shares outstanding. Each share traded at ₹4,500 six months ago. Kavita bought 100 shares for ₹4,50,000 total investment. Market conditions worsened due to the economic slowdown. Bajaj Auto shares fell to ₹3,800 currently. Kavita's investment value has dropped to ₹3,80,000 now.

Kavita's Current Position:
 

• Original investment: ₹4,50,000
• Current value: ₹3,80,000
• Paper loss: ₹70,000 (15.56% decline)
• Dividend received: ₹500 (₹5 per share)
• Net loss: ₹69,500

Understanding these risks helps investors make informed decisions about equity investments.

Conclusion

Equity shares constitute fractional ownership stakes in corporate entities while simultaneously offering substantial growth potential through multiple revenue streams. They generate dividends, confer voting privileges, and present capital appreciation opportunities that can significantly enhance portfolio performance. Nevertheless, these securities inherently carry market risks and exhibit considerable price volatility.

Investors should conduct comprehensive fundamental analysis before executing share purchases. Strategic diversification across disparate sectors effectively mitigates concentrated portfolio risk. Equity shares particularly suit long-term investors with substantial risk tolerance who are pursuing aggressive wealth accumulation strategies.

FAQs

Q1: What is an equity share? 

It is a certificate showing ownership in a company.

Q2: How do investors make money from equity shares? 

Through dividends and capital gains, when share prices rise.

Q3: What is the difference between buying shares directly and through mutual funds?

Direct buying gives you specific company ownership, while mutual funds spread risk across many companies.

Q4: How do company splits affect my investment value? 

You get more shares at a lower price, but total value stays the same.

Q5: What happens during market crashes? Should I sell immediately?

Market crashes often create buying opportunities for patient investors

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