Equity shares are also known as Ordinary Shares. The money invested in the equity shares of a company is a part of the capital of the company. When an investor buys a company’s share or equity, he gains partial ownership rights of that company. The amount so invested on the equity shares of a company is not redeemable except when the company goes into liquidation (On winding up, the shareholders will receive surplus, after all the obligations are met) or in certain cases where the company buys back the shares issued by it to the public.
When a company makes an Initial Public Offering (IPO) and new securities may be bought. Shares that have already been issued are bought and sold in the secondary market. The market in which equity instruments are traded is called the equity market and is also commonly referred to as the stock market. The stock market allows sellers and buyers to deal with equity or shares on the same platform. The investors must have a Demat account and trading account in order to trade in equities.
Equity shareholders do not have any cumulative rights to dividends. The rate of a dividend may vary from year to year, depends upon the profits of the company. When the company makes a higher profit the shareholder earns a higher dividend determined by the management of the company. If profits are insufficient, equity shareholders may not get any dividend at all during that financial year. The equity shareholders not only get the benefit of dividends but they also get the benefit of price appreciation in the value of their investment in the years of prosperity when the business is good and profits are large.
The management of the company is elected by the equity shareholders. The equity shareholders can vote in the election of directors. They can also take part in the making of certain important company decisions. The existing holders can purchase a proportionate part of future share issues announced by the management of the company. The right of shareholders to purchase such future shares issued by the company is known as a rights issue.