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Equity Shares – Advantages, Risks, & How to Buy Equity Shares?

  • Marisha Bhatt
  • Feb 07 2022
  • 6 minutes
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Equity shares are one of the most preferred and widely traded securities in India. An equity share or a stock is a small portion of a company that an investor purchases with an objective to fetch profits. By owning a stock, an investor becomes a shareholder of a company. The investor thereby has a share in the company’s profits or losses.

Each equity shareholder has voting rights, using which he/she can vote in any major decision making of the company. Apart from gaining profits due to rise in the share value, equity shareholders can also get dividend payments from the company. Generally, large-sized and well-established companies tend to pay dividends and bonuses due to the availability of more assets at hand. Thus, even if an investor buys 1 share of a company, he/she gets a share in the company’s profits or losses, along with voting rights.

Why do companies issue equity shares? 

The main objective behind companies issuing equity shares is to raise capital from investors. This capital can be utilised for various purposes, including:

  • Acquisition 
  • Expansion
  • Setting up future cash reserve
  • Clearing outstanding debts
  • New product launches

The key benefit here is that companies can conserve cash in an effective way. Raising capital through other instruments, such as bonds, usually requires periodic interest payments apart from the principal repayment. This can burden the cash reserves of the business.

With stocks, however, a dividend is entirely optional. Many companies prefer not to pay dividends in order to conserve more cash.

What are the advantages of investing in equity shares?

Here are some of the noteworthy benefits of investing in equity shares:

Voting rights

Voting rights are available to investors who invest in an equity share of a company. Through these, investors can vote on various corporate policies and also important business decisions. The more the number of shares that an investor has, the more the voting rights and therefore higher the power in decision-making in a company.

High returns

Shares tend to provide inflation-beating returns, especially in the long term. This is one of the reasons why they enjoy more popularity among investors as compared to other instrument types.

Other than financial investments, share in profits, and voting rights, equity shareholders have limited legal binding. Thus, in case the company lands into legal trouble, the shareholders are not held responsible.

Liquidity

Equity shares offer high liquidity since these can be easily bought and sold on the markets. This helps investors to buy or sell shares depending on the company’s expected performance.

What risks should investors know about before buying equity shares?

Here are some of the risk factors related to equity shares that investors must take note of:

No preference in dividend pay-outs

If the company earns profits and decides to distribute dividends to investors, equity shareholders are last in the queue to get the advantage, if any. Dividends are distributed to equity shareholders only after preferred shareholders and bondholders have been paid dividends and interests, respectively. This causes uncertainty and a lack of priority with regards to dividend pay-outs.

Market risks

Returns from equity shares are never guaranteed. If a company doesn’t perform well, it can result in falling share prices and investors may prefer to liquidate their positions. Therefore, equity shares may carry higher risks.

Why do investors prefer buying equity shares? 

Investors are always on the lookout for different ways of wealth creation. Equity shares, if invested correctly, can provide high returns as compared to other asset classes.

Investors mostly buy equity shares to:

  • Participation in company growth 
  • Fetch regular income through dividends
  • Gain bonus shares which help in increasing their shareholding
  • To gain voting rights and participate in important decision making

How to buy equity shares?

To invest in these shares, an investor must have three essential accounts: 

  1. Demat account for holding shares under the investor’s name
  2. Trading account with a stockbroker registered with a stock exchange, mainly for executing buy and sell orders 
  3. Linked bank account 

The two main ways in which an investor can invest in equity shares are:

1. The IPO-way

A company announces a public listing when it launches shares for the very first time. This process is known as Initial Public Offering or IPO. Investors can buy shares of the company by applying for an IPO through their net banking account or they can also place bids for equity shares through stock exchanges. 

2. Buying from the stock market

Investors can also buy or sell stocks at any time through the stock markets. Here is the process to do so:

  • Open a demat and trading account along with a linked bank account
  • Log in to the trading account
  • Choose the shares to be purchased
  • Know the price level at which you would like to buy
  • The transaction is completed post confirmation and transfer of funds

Conclusion

Equity shares should be considered an asset class instead of an investment instrument. Investing in these requires detailed research, fundamentals, and company financials. While investing in equity shares, an investor has to give significant time and gather a fair understanding of the financial markets. Therefore, investors must ensure to know the basics and accordingly invest as per their investment goals.

FAQs

What are the alternatives to equity share investments?

Some of the commonly used alternatives to equity share investments are debt instruments, fixed-income securities, bank deposits, etc. However, these may not fetch high returns in comparison to equity shares.

How much should a beginner invest in stocks in India?

An investor who is just starting off with stock investments can invest as little as Rs. 10. However, the higher the sum, the better the chances of larger profits. Depending on how comfortable an investor is with the stock markets, he/she can invest an amount as per personal preference.

Which are the different types of equity shares?

From a company’s perspective, some of the categories of equity shares include authorised share capital, issued share capital, subscribed share capital, paid-up capital, right shares, and bonus shares.

What is active trading?

Active trading is an , an investor trades using techniques like scalping, intraday trading, and swing trading. This helps to fetch quick profits.

What is passive trading?

Passive trading is often used by investors who want to contain the risk exposure. This strategy involves long-term investment, mainly focusing on the buy and hold technique.

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