What are Equity Shares?
An equity share, also known as an ordinary share, is fractional ownership that commences the maximum entrepreneurial obligation associated with an investment experience. Any corporation can use equity shares as a long-term financing source. These are non-redeemable shares that are issued to the general public. Shareholders have the right to vote, share profits, and claim a company’s assets. Equity share value can be expressed in a variety of ways, including par value, face value, book value, and so on.
Features of Equity Shares:
Equity shares have the following qualities, making them among the most effective stock market investment vehicles.
- The majority of equity shares give investor voting rights, allowing him or them to select the people who will govern the company.
- Additional profits made by a corporation throughout a fiscal year are available to equity shareholders. It boosts the total wealth of individual investors who have made significant investments in a company’s stock shares.
- Even if equity shares are not returned until a company decides to shut, they can be traded in the secondary capital market. As a result, investors can withdraw funds from a corporation at their leisure. It promises significant wealth generation by increasing the value of such shares.
Advantages vs. Disadvantages of Equity Shares:
Advantages of Equity Shares:
Individuals can benefit from investing in these shares in a variety of ways.
A few of them are listed below.
- Higher returns: Investing in equities shares yields a high rate of return. Shareholders have the chance to build wealth not only through dividends, but also through capital appreciation.
- It serves as a shield against inflation: When a person invests in equity shares, he or she has the opportunity to make a massive profit. The rate of return earned is frequently greater than the pace at which the investor’s purchasing power is eroded owing to inflation. As a result, buying stock functions as a hedge against inflation.
- Investing efficiency: Investing in stocks is simple to understand. To invest through numerous stock exchanges in a country, investors can use the services of a stockbroker or financial planner. If a person has set up a Demat account, he or she can buy stocks in a matter of minutes. So, whether an investor chooses to invest via NSE or BSE stocks or other means, he or she will benefit from the convenience of doing so.
- Investing portfolio diversification: Debt instruments are preferred by most investors because they are low-risk investment options with lower volatility. Individuals can diversify their investment portfolio by investing in shares for higher profits, while debt instruments may not always yield high returns.
Disadvantages of Investing in Equity Shares:
While equity investments have a number of benefits, they also have a number of drawbacks.
A few of them are listed below.
- High market risk: When compared to other investment options such as debt instruments, investing in equity shares can offer significant profits but also expose investors to considerable risk. When investing in equity shares, an investor runs the risk of losing all of his or her money.
- Risks of underperformance: Because equity investments are market-related securities, they may or may not perform as expected by investors. This is referred to as performance-related risk, and it can influence both individual stocks and stocks across a sector or sectors.
- Higher inflation risk: As a result of growing inflation, a company’s value may be diminished, and its shares may no longer provide potential profits.
- Risk of Liquidity: Investors may be forced to sell their shares at a considerably lower price than their fair market value due to liquidity risk. When a corporation is unable to satisfy its loan obligations in the short term, it faces liquidity risk.
- Risks posed by social and political shifts: Ongoing social and political concerns in a country might stifle a company’s growth. For example, if a government intends to support indigenous enterprises, international enterprises may be restricted from entering the country. In this case, an investor who has invested in home-grown enterprises will benefit from greater performance of his or her capital.
Read Next: “Capital Protection Plan.”
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