You might have heard in the stock market to purchase the share of this company or purchase equity of that company. So to let’s understand What are equity shares or What is stock in the Stock Market?
Before doing an investment you should understand that:
- What is the structure of equity?
- What is the meaning of shares or equity?
What is the Meaning Of Shares?
Equity Meaning: A share or equity indicates a unit of ownership of the company. If you are a shareholder of that company, It implies that you as an investor of this company and Hold a percentage of ownership of the issuing company. As a shareholder you bear the benefits of the company’s profits, and also bear the disadvantages of the company’s losses.
Types Of Shares
Now that you know What Is the Meaning Of Shares, Now you must understand that broadly share can be of two types in the Market:
- Equity Shares
- Preference Shares
What are Equity Shares?
These shares are also known as ordinary shares, and it comprises the bulk of the shares being issued by a company. Equity shares are traded and transferable actively by investors in stock markets.
As an equity share shareholder, you are not only entitled to voting rights on particular company issues but also have the right to receive dividends from that company. However, the dividends are issued from the profits of that company. But dividends are not fixed.
You must also note that equity share shareholders are subject to the maximum risk because of market volatility and other factors affecting the stock markets – as per their amount of investment in that company.
A private company Xyz Private Limited is formed. A private limited company decided to set up a manufacturing plant. It further needs an investment of 1 lakh rupees for the setup of the manufacturing unit.
The investment can be acquired in the form of bank loans, loans from friends, or it can gather 100 people and tell them, we are 100 people. We all will invest Rs.1000 each in this company. This will bring all investment. We all 100 people will have a 1% of share each in the company.
It means whatever will be the profit would be distributed among 100 people of the company as 1% each. If at the end of the year company earns a profit of 10 lakh, then everybody will receive a profit share of Rs. 10,000 each. This is known as equity ownership or having is share in the company.
Any company that wants to raise investment can either take a loan or give a share of the company. There are so many benefits of giving a share of the company.
What is Preference Share?
Preference shares also known as preferred shares are those shares that enable shareholders to receive dividends announced by the particular company before receiving to the ordinary equity shareholders.
If a particular company has decided to pay out its dividends to investors, preference equity shareholders are the first to receive payouts from that company.
Benefits of equity for a company
The benefits a company can have by raising equity by selling shares through IPO are as follows:
#1 No fixed liability
When the company raises money from the market, It is not a fixed liability. You can raise money from the market without any security or property mortgage. You give people a share in the company.
You do not have the fixed liability and complete responsibility for repaying the money. It does not mean that you have in mind not to return the money.
You should have in mind to grow the funds raised from the public. This will help in building the confidence of investors in your company. They will further invest in your company.
Earlier the share price of Jet Airways was Rs. 400. Now, its share price is Rs. 20. This is because the company became bankrupt. Now the owners of the company do not have any value for the shares.
You could not go to Mr. Naresh Goyal that you want back the Rs. 400 on which you purchase the share of the company. You cannot ask for the additional interest on Rs. 400.
You cannot do this because you have decided to purchase the shares. If the share prices would have increased to Rs. 700 from Rs. 400, then you would not have returned Rs. 200 to Mr. Naresh Goyal assuming that Rs. 500 is sufficient for you.
In the case of high share prices, you would have proud of your idea of investment in Jet Airways.
So if a company raises funds through equity, then it does not have to bear a fixed liability of returning the amount. It means it is ok if the money is not returned.
#2 No need to pay Interest
As you take a loan from the bank, you need to pay interest every month. The interest may be the 10%, 12%, 15%, 18% or 24%. You need not give any form of interest in the equity.
If you are earning profit at the end of the company, then it is your discretion as a company whether you want to give some dividends to the shareholders or not.
You can invest the profit back into the company to grow it. The shareholders or investors of the company will also be happy with the growth of the company.
#3 Create liquidity
Whenever the company wants to raise money, it is available on the stock market. The company can sell its share and quickly raise money.
Mr. Mukesh Ambani needed to raise the money; he quickly sold his shares to create liquidity and raised funds of approx 1.5 Lakh crore.
#4 Owners can sell their shares
The Owners of the company can also sell the shares and get the money.
The owners of the company may also feel that:
They put in a lot of effort for a long time. Now they need to in case 100 to 200 crore at a particular time, so the owners can also cash out.
The house of Mukesh Ambani is of Rs. 8000 crores, do you think that it is possible with his 15 crores yearly income? No, he might have sold some of his shareholdings of Reliance.
He would have made that house with the money he received after selling the shares.
So the owner can also cash out the shares for meeting his other expenditures.
#5 Allows selling of the company
In the future, you and your children do not want to do the business further than you may sell the company.
Mr. Kishore Biyani sold his company to Reliance Retail. The company was sold quickly because the company was listed on the stock exchange. The company shares have a share price. It made the valuation of the company easy.
Suppose the number of shares of the company is 100 crore, the price of one share is Rs. 50. So, the value of the company is Rs. 5000 crores.
Anybody can purchase the company by purchasing the open shares of the company in the stock market.
The above-mentioned were some excellent benefits for a company when it raises funds from equity as compared to debt.
Benefits of equity for an Investor
The Investors have the following 4 benefits:
#1 Possibility of multi-fold returns
It means if you invest 100 rupees in a company then it may raise Rs. 1000 in the next 10 years due to a big jump in the share price. It the money is invested in FD, then it will give only 5% to 6% of the Year’s return.
If you will keep the money invested for at least 10 years in the share market, then it has been time again proved that shares of the good company provide 15 to 25% of the yearly return.
#2 Helps beat the Inflation
You can earn multi-fold returns from the investment in shares, so you can beat inflation also. Inflation is the lion that is running after your investment very fast. If the FD returns rate is 5 to 6% then your investments have been eaten by a lion because the inflation rate is 10%.
To beat inflation, your investment should give better returns. It is possible to beat inflation by doing investment in the stock market. If you cannot directly invest in the share market then invest through mutual funds.
#3 Creates long-term Wealth
In FD suppose you invest 100 rupees and get Rs. 5 as a return at the end of the year. You generally spend the money received as interest. In equity, the share price keeps on increasing and this creates the long-term value of their investment or wealth.
#4 10% tax rate on gains
Whatever income you on whether from business or Salary, a top bracket earner needs to pay 35 to 36% taxes in India. If you will earn the value by long-term creation like you purchase shares of a company and hold it for more than 1 year and sold after that then you need to pay only 10% text on the gains.
You have a good chance to save on tax because on your whole income you need to pay almost 36% of tax whereas in long-term capital gains you need to pay only 10% tax and that is only on gain.
You purchase a share of Rs. 100. It sold for Rs. 150. Then you need to pay tax on the gain which is Rs. 50 it means only 5 rupees tax you are required to pay.
You should also understand Why companies issue Shares in the Stock Market?
Do investment in equity for the long term to save Tax and Use equity or mutual fund investment as a source to beat inflation. Use equity investments to ensure the liquidity of your Investments.
Now, I hope you all understand Meaning Of Shares or What are Equity Shares in the Market. If you have any questions regarding the ‘What are Equity Shares’ Article. You can comment below this post. We are happy to help you.