What is an Equity Share?
An equity share, also known as an ordinary share, signifies ownership in a company. Equity shareholders own a part of the company proportional to their equity stake. They have voting rights, allowing them to participate in corporate decision-making. Equity shares typically promise dividends, which are a share of the company’s profits paid to shareholders. Upon the company’s liquidation, equity shareholders have a claim on the residual assets of the company, after settling all liabilities.
Key Characteristics:
- Voting Rights: Shareholders can vote on major corporate decisions, including electing the board of directors.
- Dividends: Shareholders may receive periodic payments from the company’s profits.
- Capital Gain: Shareholders benefit from the appreciation in the value of the shares.
- Residual Claim: Shareholders have a claim on the company’s assets after all debts and other liabilities are paid off in case of liquidation.
Examples of Equity Shares:
- Apple Inc. (AAPL) Ordinary Shares: Shareholders gain ownership in the tech giant, participate in annual meetings, and receive dividends.
- Tesla Inc. (TSLA) Common Stock: Provides shareholders with voting rights on corporate matters and a share in the potential appreciation of the stock value.
- Amazon.com Inc. (AMZN) Common Stock: Investors own part of one of the largest e-commerce entities, participating in its growth and receiving returns through stock price appreciation.
Frequently Asked Questions (FAQs):
Q1: What are the benefits of holding equity shares? A1: Holding equity shares offers potential capital gains through stock price appreciation, dividends as a share of company profits, and voting rights on major corporate decisions.
Q2: How do equity shares generate returns for investors? A2: Returns are generated through capital gains (increase in stock price), dividends (profits distributed to shareholders), and residual claims (assets upon liquidation).
Q3: Are equity shareholders guaranteed dividends? A3: No, dividends are not guaranteed. They are paid out at the company’s discretion based on profitability and corporate policies.
Q4: What risks are associated with equity shares? A4: Risks include market volatility, potential loss of investment if the company performs poorly, and subordinated claims on assets in bankruptcy.
Q5: How do equity shares differ from preferred shares? A5: Equity shares offer voting rights and dividends that can vary, while preferred shares typically provide fixed dividends and have higher claims on assets in liquidation but lack voting rights.
Related Terms with Definitions:
- Dividend: A portion of a company’s earnings distributed to shareholders.
- Preferred Shares: A type of share that generally provides fixed dividends and priority over equity shares in asset claims but usually lacks voting rights.
- Capital Gain: The profit earned from the sale of securities or assets.
- Initial Public Offering (IPO): The process through which a private company issues equity shares to the public for the first time.
- Market Capitalization: The total market value of a company’s outstanding shares.
Online References:
- Investopedia - Equity Shares
- The Balance - What Are Equity Shares?
- NerdWallet - Understanding Equity Shares
Suggested Books for Further Studies:
- “The Intelligent Investor” by Benjamin Graham
- “Common Stocks and Uncommon Profits” by Philip Fisher
- “Security Analysis” by Benjamin Graham and David Dodd
- “One Up On Wall Street” by Peter Lynch
- “The Little Book of Common Sense Investing” by John C. Bogle
Accounting Basics: “Equity Share” Fundamentals Quiz
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!