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Investing in the stock market feels daunting at first. You can invest in various financial instruments like bonds, shares, debentures, mutual funds, etc. however when it comes to investing in stocks, a basic understanding of investing in public listed companies will provide a more comprehensive understanding.

 A company when looking to raise capital has two basic sources. It can borrow finance from lenders through multiple debt instruments like debentures that allow them to raise the capital from the public, or the other method is raising money through equity. Here the company shares the ownership of the firm with the owners in exchange for their capital. The firm does this by issuing shares.

 This article aims at educating you about equity shares, pros and cons, and how they function.

 What are equity shares?

Equity shares are long term financing options for companies who look to raise capital from the public. Each equity share represents a unit of the company that is owned by the shareholder. The more equity shares a shareholder possesses, the bigger the ownership in the company. Equity shares are also referred to as stock, shares and are often given as investment opportunities to the public.

 6 advantages of equity shares are listed below

1.Profit potential

The profit potential of equity shares is more as compared to any other investment security. Though the current dividend is low, the potential of capital gain is great. The total yield or yields at the time of maturity may be huge over a period of time.

2. Limited liability

The owners of a corporate firm usually have limited liability. Equity shares are generally fully paid and hence the investors do not lose their investment in most cases. They are not liable for any failure on the part of the organization.

 3.Voting rights

Voting rights are given to every investor that buys the company shares. The voting rights allows investors to take part in major business decisions and vote on corporate policies. The more equity shares an owner holds, the larger are his decision-making rights in the company.

4.Liquidity

Equity shares can be bought or sold by investors as they are highly liquid. This feature not only helps investors buy shares quickly but also sell them if the firm is not performing well.

5.Tax advantages

Equity shares offer tax advantages to the investors. The larger returns on the equity shares are a result of an increase in capital gains. These are taxed at a lower rate than other incomes in most of the countries.

 Why do investors buy equity shares?

Equity shares have provided the best returns when compared to other financial instruments. Investors constantly look for options to grow their hard-earned money. Therefore equity shares are their preferred choice.

 Investors buy stocks to

Participate in the company growth

Earn regular income from the dividends given by the company

Earn bonus shares to increase their shareholdings

Become a part of decision making by acquiring voting rights

 How do equity shares work?

Equity shares work on the demand and supply of the market.

●      If more people are selling the company’s stock, the price will fall

●      If more people are buying shares of a company then the prices will rise

 People buy and sell stocks based on their predictions about the future of the company

●      If they believe a company will perform well in the future, they will buy the company’s stock

●      If they feel that the company will prepare poorly in the future, they sell the stock