Advantages Of Equity Shares

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  • 24 Feb 2023

What Are Equity Shares?

Equity shares are a way for the investors to get part ownership of the companies, thereby benefiting from the profits and share market’s upward movement of the share. The companies issue their shares to the public and utilize the funds towards various activities of the business. Investors of the company get the right to vote, share in profits, claim on assets of the company, etc. Face value, par value, book value, etc. are some of the terms used to express the value of the equity shares of the company.

Let us now learn about the advantages of equity shares.

  • Profit Potential

Equities have the potential to fetch good returns. In fact, these returns can potentially be tad bit better than most other investment options. Equities are known to give returns when you stay invested for a long run. For example, a small cap stock worth Rs. 20 today can grow to be worth thousands of rupees, if the company does well in the long run.

  • Potential returns that tackle inflation

Equity shares have the potential to give returns that are higher than inflation. This matters because any returns lower than inflation can mean you lose your purchasing power. Here's an example: Let's say you bought a product worth Rs 100. A year later, it costs Rs 150. This means the power of Rs 100 to purchase something has reduced. If you were to invest the same Rs 100 and it did not rise to Rs 150, you won't be able to buy that product worth Rs 150.

  • Dividend Income

The dividend is the income of the company that it distributes to its shareholders out of the profits. The dividend income act as a source of income for the shareholders of the company. It would not be wrong to say that dividend is one of the ways through which an investor earns a return on his investment. The rate of dividend varies from company to company according to their profits. Most long-term inventors prefer investing in those companies which have a good and consistent record of distributing dividend to the shareholders.

  • Exercise Control

When you invest in the stock of a company, you get the voting rights in it. Therefore, with the purchase of shares of a company you can exercise control and get ownership in the company. You can even participate in the shareholders or any other important meeting of the company.

  • Right Over Assets and Income

When you purchase the shares of a company, you get a part of the ownership in the company. This makes you the owner of the assets that the company owns. Also, investors can receive a share of the profits through dividends. They also stand to indirectly benefit when the company makes profits over time by way of an increase in the share's value.

  • Diversification of Portfolio

Equity markets provide investors an opportunity to diversify their portfolio. Diversification of portfolio helps in risk management and protects you from volatile fluctuations in the stock price. What makes diversification beneficial to the investor is the fact that underperformance of one sector can be compensated with the outperformance of another sector. Like for example, you invest in multiples stocks of different sectors and due to some reason, a particular sector is not able to perform well, then the losses in such investment can be compensated with sectors that have performed well in your portfolio.

  • Bonus Shares

Many times the companies decide to issue bonus shares to their shareholders. Bonus shares can be said as a type of dividend where the companies give the shareholders free shares. On numerous occasions, the bonus shares are given in place of dividends. For example, say you have 100 shares of a company trading at Rs. 1500. Now, if the company allocates bonus shares in the ratio of 10:1 then, you will get additional 10 shares. This means that the value of your investment has gone up from its initial Rs. 150,000 to Rs, 165,000, an added profit of Rs. 15,000. Now, if in a couple of months the share price increases to Rs. 1600, your investment could stand at Rs. 176,000.

  • Right Shares

Whenever a company requires further capital for expansion or any other business use, it issues the right shares. Right shares are those shares which are first offered to the existing shareholders of the company. The current investors have priority over other general investors during the right issue of shares. Right shares are generally (not always) issued at a price that is lower than the current market price of the stock. Therefore, the existing shareholder can take the benefit of purchasing the shares at a lower price or they can pronounce their right in someone's favour to get a value of right.

  • Stock Split

Stock split is another advantage of equity shares. Stock split means splitting the shares into parts and reducing the price of shares, leading to a higher interest of investors. The reduction of share price makes the stocks even more liquid and higher volumes lead to a spike in the price if the company is performing well. Thus, the stock split proves to be very beneficial for investors in the long run.

  • Liquidity

Liquidity is one of the main advantages of investing in equity shares. Liquidity means the volume of shares that are traded on the stock exchange. When you purchase the shares of a company, you have the option to easily sell them on the exchange. The availability of buyers to purchase your stocks during the market session make the equity market appealing. Therefore, whenever you are in urgent need of cash you can easily sell your stocks on the exchange and get money credited into your bank account.

  • Share in Growth

When you invest in the equity market you become the owner of the company. So being a shareholder of the company you get the opportunity to witness the growth and rise of the company. As an investor, it is a wonderful experience to be a part of a company that rises from the bottom and reaches the glory. Furthermore, you also get the reward of the growth of the company in the form of appreciation of the share price.

  • Tax Advantages

Investment in equities has several tax benefits. The capital gains on returns on equity shares are taxed at a much lower rate in comparison to other countries. There is no lock-in period associated with equity shares from the viewpoint of taxation. However, there are two types of taxes levied based on the time you stay invested: Long-term capital gains (LTCG) and Short-term capital gains (STCG) tax. According to the last changes that took place in 2018, the LTCG above Rs.1 lakh are taxed at 10% without indexation. The STCG are taxed at 15% with the benefit of indexation.

  • Residual Claim

The equity shareholder has the right to make a residual claim on the assets and income of the company. This claim can be made on those assets or income that are left after paying all the stakeholders like debenture holders, lenders, etc. This advantage can become a major aspect if a company goes under. This is because, you can still lay claim to something from the company and get some of your investment back, instead of suffering complete loss. The above mentioned are some of the advantages of equity shares. But along with the advantages you must always keep some points in mind before putting your money in the stock market. Let us learn about them.

Things To Keep In Mind While Investing In The Equity Shares

  • Share markets are volatile in nature. You must be well prepared for this fact and do not get affected by regular price fluctuations.

  • Returns on equities vary from one stock to another. Some stocks can give you returns while some can run into losses. Therefore, to overcome such a situation you must be very selective and pick stocks only after research and analysis.

  • You must have a good amount of patience while investing in the stock market. Investors must remain invested in the market for the long term to reap real benefits. Longer they remain invested in the market, higher returns they can earn.

  • You must have the ability to have control over your emotions in the market. There would be instances when the volatility will make you think again about your investment decisions. But in such situations, you must not get carried away and take any decision that would lead to losses.

  • When you put your money in the stock market, you must continuously monitor your portfolio. The constant monitoring will help you in taking action at the right time when a stock is not performing well. With continuous monitoring, you can remain updated on all the news and events taking place in the stock market.

  • By keeping the above points in mind while investing in the stock market will help you in taking better decisions. One must not forget that the real benefits of the equity shares can be availed in the long term. Just like investors, companies also have several advantages of equity shares. It is because of equity shares that the companies can raise funds and use it for their businesses. Therefore, it would not be wrong to say that equity shares are beneficial not only for investors but the companies as well.

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