Equity shares are the equally divided units of a company’s capital that they raise by listing the shares on the market. Those who buy the equity shares of the company are called the shareholders. Equity shares also go by the name of stocks and if a company makes profits, the shareholders receive a part of it depending on the number of shares they hold. By raising equity shares the company can raise capital without needing to borrow money from any financial institution. Also, paying dividends to the shareholders is not mandatory if the company does not make a profit in any year. On the other hand, for investors, the rate of return in equity shares is quite high in comparison to other modes of investment and that is why they prefer to invest in them.
Types of Equity Shares
Even though the term equity shares is pretty simple, it holds a lot of variations. The different types of equity shares are as follows:
Authorized Share Capital
Authorized Share Capital is the maximum amount of capital that a company can raise at a particular point in time. It is by no means fixed and from time to time the Authorized Share Capital amount keeps changing.
Issued Share Capital
Issued share capital refers to the amount of the share capital that is provided to the investors to buy. It is the capital amount in which the shares are divided.
Subscribed Share Capital
These are the shares that have been subscribed by the investors to purchase.
Paid-Up Share Capital
Paid-up share capital refers to those shares for which the investors have paid the money. The company gets its capital amount principally from these shares.
These shares are given to the company’s existing shareholders. They are preferential equity shares that are given to the current shareholders at a price lower than their market value.
Bonus shares are the additional shares that are given to the shareholders. Usually, these shares are given in the place of dividends.
Sweat Equity Shares
These are the shares given to the existing shareholders for the hard work they have done.
Voting or Non-voting Shares
Equity shares provide voting rights to investors and are commonly known as voting shares. But when the voting rights are not available, such shares are known as non-voting shares.
Before investing in shares, it is important to know about their types so that you can get the right information about their nature.
Why Invest in Equity Shares?
It is well known that equity shares come with high risk. But even then many people prefer them as their primary form of investment. Here are some reasons why:
One of the reasons that make equity shares highly demanding is that they are highly liquid. You can easily convert them into cash, an option that you cannot find in other forms of investments. This is one of the reasons that investors prefer to buy equity shares.
Yields High Returns
As equity shares carry some risk, it automatically means that they reward in an equal measure as well. If you purchase equity shares for the long term, the returns they will yield will be much higher and lucrative.
You can buy equity shares of different companies and this will help you in creating a diversified portfolio. When the portfolio is diverse, the overall risk of your stock gets reduced as your investments are not pooled into the same source.
Equity shares are highly lucrative for the investors but one needs to assess the risk associated with them as well. Hence, it is important to learn in detail about the overview of shares and their types to get a better idea about the right investment.