Investors put their hard-earned funds into shares in the hopes of making a profit. If you want to create wealth over time, it is best to invest in company stock for the long term. While others buy in stocks to take advantage of the benefits that a corporation offers its stockholders. However, everyone is interested in knowing about the advantages of equity shares. So let’s take a closer look at share capital advantages and disadvantages.
Table of Contents
Introduction
There are numerous benefits to investing in equity shares, but there are a few things to keep in mind before putting your money to work.
Everyone who invests in the stock market should have a fundamental understanding of equity shares, but what exactly are they? How does it function, and how profitable is it to the shareholders?
Let’s take a look at some of the fundamentals of equity stocks before we discuss the benefits they bring to investors and traders.
What are Equity shares?
Equity shares allow shareholders to own a portion of a company’s ownership, allowing them to profit from the company’s profits as well as the share market’s upward growth. The firms sell their stocks to the general public and use the proceeds to fund different commercial operations.
Shareholders in the firm have the right to vote, share in profits, and hold on the company’s assets, among other things. Face value, par value, book value, and other words are used to describe the worth of a firm’s equity stocks.
To put it another way, an equity share is an ordinary share that is usually in the form of a portion or percentage of ownership.
Features of Equity Shares
- The stockholders of equity shares have the authority to lead the organization’s operations.
- It is transferable, which implies that ownership of the stock can be easily transferred to another individual. Unless otherwise mentioned in the business documents, this can be done with or without attention.
- Equity shares are perpetual in nature, and their stockholders do not receive a predetermined dividend rate.
- The responsibility of an equity shareholder is limited to the amount invested.
- The equity shareholder is the business’s legal owner, and he or she is responsible for the firm’s highest risk.
- Dividends are used to assign value to equity shares. An allocation of profit is the dividend that is paid to equity shareholders.
Example of Equity shares
The quantity of stocks that a company is allowed to issue is determined by the corporate charter. Raising equity occurs when a corporation decides to sell extra stocks to existing shareholders.
Different types of equity shares are categorized in different ways Authorized share capital, issued share capital, paid-up capital, subscribed share capital, bonus shares, and equity shares are among the most common forms of equity shares.
For example, if ABC Company has a total equity share base of 2,00,000 and you buy 40 shares, you are 0.02 percent of the firm’s stockholders.
Advantages of Equity Shares
There are plenty of advantages that might be extremely helpful to shareholders or the organisation. If the company makes a lot of money, the shareholders will get a bigger dividend. There are numerous advantages of equity shares, both for the company and for the shareholders, as mentioned below:
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Long Term Profit
Equities have the potential to pay out handsomely. In fact, these returns may be slightly higher than those of most other investing options. When you invest in stocks for a long time, you can expect to make a profit.
For instance, a small-cap stock worth Rs. 20 now could be worth thousands of rupees in the future if the firm does well.
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Beat the Inflation
Equity shares have the potential to provide higher-than-inflation returns. This is significant because any returns below inflation can result in a loss of buying power.
Here’s an illustration: Let’s imagine you spent Rs 200 on a product. It now costs Rs 250 a year later. This signifies that the purchasing power of Rs 200 has decreased. You won’t be able to buy the thing costing Rs 250 if you invest the same Rs 200 and it doesn’t raise to Rs 250.
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Dividend
The dividend is the portion of overall profits that it provides to its shareholders. Dividend income serves as a form of income for the firm ‘s owners Dividends are among the approaches an investor obtains a return on his investment, and it is not incorrect to claim that they are among the possibilities.
Dividend rates differ from firm to company, depending on profits. Most long-term investors choose to put their money into companies that have a track record of paying out dividends to shareholders.
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Voting Rights
When you buy a firm’s stock, you obtain voting rights in that entity. As a result, by purchasing stock in a company, you can gain control and ownership of the company. You can even attend the firm’s shareholders meeting or any other significant event.
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Right Over Assets and Income
When you buy stock in a firm, you are purchasing a piece of the company’s ownership. As a result, you are the owner of the company’s assets. Dividends are another way for investors to share in the profits. They will also gain indirectly if the company produces profits over time due to the rise in the value of the stock.
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Diversification
Investors can spread their portfolios by investing in the stock market. Diversification of your portfolio enables you to minimize stress and safeguards you from volatile stock price swings.
The idea that poor performance in one area can be offset by outperformance in another is what makes diversity favorable to the investor.
For instance, if you invest in numerous companies from various sectors and one of them fails to execute well for whatever reason, the losses in that investment can be offset by investments from other industries in your portfolio that have done well.
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Ease of Transfer-ability
When it comes to the advantages of equity shares, the ease of transferability is one of the most important. The owner of the shares can readily transfer his stake to another person, whether a new or current shareholder.
As a result of this, shares in some small enterprises are non-liquid, making it difficult to sell.
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Bonus Stock
Frequently, firms prefer to issue bonus shares to their stockholders. Bonus shares are a sort of dividend in which corporations provide free stock to shareholders. Bonus shares have been distributed in place of dividends on various occasions.
Assume you own 50 shares of a firm that trades at Rs. 500 each. If the corporation distributes bonus shares in a 5:1 ratio, you will receive a further 5 shares.
This means that the value of your investment has increased from Rs. 25,000 to Rs. 27,500, a gain of Rs. 2,500 in profit. Now, if the stock price rises to Rs. 700 in a few months, your investment may be worth Rs. 38,500.
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Right Issue
When a firm needs additional funds for growth or other business purposes, it issues the right shares. Right shares are those that are first issued to the company’s existing shareholders. During the right issuance of shares, present investors have preference over other general investors.
Right shares are usually (but not always) offered at a discount to the stock’s current market value. As a result, existing shareholders can gain by purchasing shares at a lower price or by declaring their right in the support of someone else to receive a value of right.
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Share Split
Another advantage of equity shares is the ability to split the stock. The term “stock split” refers to the division of shares into parts and the lowering of share prices, resulting in increased investor interest.
If the company is operating well, the lower share price makes the shares even more liquid, and bigger volumes lead to a price surge. As a result, the stock split is profitable to investors in the longer term.
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Liquidity
One of the key advantages of investing in equities is its liquidity. The volume of stocks traded on the stock exchange is referred to as liquidity. When you buy a company’s stock, you have the option of quickly selling it on the stock exchange.
The equities market is tempting since there are buyers available to acquire your shares during market hours. As a result, you may simply sell your shares on the market and have money refunded to your bank account anytime you need cash.
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Growth
When you invest in the stock market, you become the firm’s owner. As a stakeholder, you will have the chance to view the firm’s growth and development.
Being a member of a business that emerges from the ashes to glory is a great experience for an investor. Moreover, you receive a reward for the company’s success in the shape of a rise in the stock price.
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Tax Benefit
Investing in equities gives a number of tax advantages. In contrast, other countries’ capital gains on profits on equity stocks are taxed at a substantially lower rate. From a tax standpoint, there is no lock-in period linked with stock shares.
Long-term capital gains (LTCG) and short-term capital gains (STCG) taxes, on the other hand, are levied depending on the length of time you remain invested.
According to the most recent modifications made in 2018, LTCG over Rs.1 lakh is taxed at 10% without indexation. The STCG is taxed at a rate of 15%, with the extra advantage of indexation.
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Claim
The equity stockholder has the right to a residual claim on the firm’s assets and earnings. This claim can be placed on any assets or income that remain after other stakeholders, such as debenture holders and lenders, have been paid.
If a company goes bankrupt, this benefit can become quite important. This is because, rather than losing your entire investment, you can still claim stuff from the firm and obtain a portion of it back.
Advantages of Equity Shares for Company
There are some advantages of equity shares for companies as well. Let’s have a look on them as well:
- Dividends are not required to be paid to shareholders. If the company wishes to reinvest the additional capital on hand, they may do so.
- The secondary market is where shareholders purchase and sell stocks. As a result, the company is not required to pay the investors actively for the stocks they own.
- There will be no interest paid on the funds raised through common stock. It’s completely free for the firm!
Advantages of Equity Shares for Employees
If there are employees in a company who need to be safeguarded or who need to be praised for their efforts, Sweat Equity shares are a nice method to do so.
Sweat equity shares can be issued to selected employees if the company is at least one year old. This can be accomplished by assigning these stocks at a share discount value.
This value may be lesser than the share’s face value (as per companies act 2013). This serves as a motivation for both the employee and the company because the employee’s dedication can be seen for a longer period of time.
After Advantages of Equity Shares let’s check out the disadvantages of equity shares as it is also equally important for investors.
Disadvantages of Equity Shares
The following are some of the major disadvantages of equity shares:
- The market price of equity shares rises and falls significantly from the perspective of a stockholder. This can have a negative impact on the investment’s value.
- The total of the catering equity capital is nearly equal to the debenture cost. As a result, equity shareholders’ expectations rise when compared to debentures or preference shares.
- One of the main disadvantages of equity shares is that they require an underwriting charge and relatively high brokerage flotation fees.
- From the standpoint of the firm, equity is the best between the various channels of finance of the organisation.
Risk In Investing in Equity shares
The equity market is the most unpredictable section of the stock market, with minor volatility having a significant impact. Returns on equity investments are paid out after all of a firm’s other responsibilities have been met.
During a market collapse, a company ‘s manufacturing cycle is disrupted, resulting in lower profits. Before money is allocated as shares investment returns, this lesser share of profit is used up to meet all financial obligations.
As a result, stock markets tend to suffer during market downturns. Price volatility is a component of the business routine which has linked ups and downs based on a nation’s economic and social situation.
Things to Remember when investing in Equity stocks
These are major things which you should keep in mind while investing in stock market:
Volatility
The stock market is highly volatile. You must be well ready for this reality and avoid being influenced by regular price volatility.
Returns on Equities
The returns on equities differ from one stock to the next. Some shares can provide you with returns, while others can cause you to lose money. To address such a scenario, you must be incredibly cautious and choose securities only after substantial research and overview
Long Term View
When investing in the share market, you must have a lot of self discipline. To earn genuine gains, investors must remain invested in the market for the longer run. The longer they stay in the market, the better the profit they can earn.
Emotions
In order to be successful in the market, you must be able to control your emotions. There will be times when the uncertainty will cause you to reconsider your investment decisions. However, in such circumstances, you must avoid getting carried away and making decisions that will result in losses.
Monitoring
When you invest in the share market, you must constantly evaluate your portfolio. When a stock is underperforming, periodic tracking will allow you to take steps at the correct moment. With active monitoring, you can stay up to date on all of the share market’s news and happenings.
Note
Keeping the above- mentioned facts in mind when investing in the stock market will help you make better judgments. It is important to remember that the true advantages of equity shares can only be realised in the long run.
Companies, like investors, benefit from equity shares in a variety of ways. Companies can enhance capital and use them for their operations thanks to equity shares.
Conclusion
Always keep the disadvantages and advantages of equity shares in mind before investing. It will help you in taking the right decisions with more chances of success.
This is all from our side regarding the advantages of Equity Shares. Let us know your views about advantages of shares in the comment section.
Other Interesting blogs related to benefits of equity shares:
Difference Between Shares and Debentures
Difference Between Equity Shares and Preference Shares
FAQ About Benefits of Investing in Equity Shares
Advantage of equity share from company point of view?
These are the major advantages of equity shares from company point of view: 1. Completely free fundraising for the firm they don't need to pay any interest or anything. 2. They are under no obligation to pay dividends. 3. A bigger equity capital base improves the firm's creditworthiness in the eyes of creditors and investors.
Features of equity shares
Investors of equity shares have the right to a dividend on the firm's excess profits. The rate of dividend on equity capital is set by the leadership team The nature of equity shares is interchangeable. They can be forwarded with or without concern from one individual to another.
What is equity shares?
Equity shares allow shareholders to own a portion of a company’s ownership, allowing them to profit from the company’s profits as well as the share market’s upward growth. The firms sell their stocks to the general public and use the proceeds to fund different commercial operations.
Advantages of shares
these are the major advantages of shares: Long Term Profit, Beat the Inflation, Dividend, Voting Rights and Right Over Assets & Income.
Benefits of equity?
These are the major Benefits of equity: Long Term Profit, Beat the Inflation, Dividend, Voting Rights and Right Over Assets & Income.
