Introduction To Investment In Equity Shares

What are equity shares?

In a company, the total capital of the business is divided into smaller units referred to as equity shares. An investor subscribing to the equity shares of the company can contribute to the total capital of the business and thus, become an equity shareholder of the same company. Equity shares act as the long-term financing source for the companies, and equity shareholders, in return, can earn a high dividend yield and capital appreciation. 

In addition to the monetary benefits, equity shares also offer voting rights on significant matters of the company to the shareholders. An investor investing in the equity shares of the company is treated as an owner of the same entity wherein the ownership is limited to the extent of equity shares held by the investor. 

Enlisting the benefits of investing in equity shares:

Here mentioned are the benefits of investing in equity shares:

1. Ownership: By investing in the equity shares issued by the company, an investor can become the owner of the same entity to the extent of equity shares held by the shareholder. Now that an investor is an owner, they can exercise control over the company and can also enjoy a share in the company’s income.
2. Higher Returns: One of the significant advantages of investing in equity shares is that it can generate high returns in a short period compared to other investment options. 
3. Dividend: The main benefit of investing in equity shares is that the shareholders do not earn a high dividend yield but also earn returns in the form of capital appreciation. By dividend here implies the distribution of surplus profit earned by the company to the equity shareholders.
4. Limited Liability: Shareholders are always surrounded by the risk of adversity when it comes to the companies, like operational losses, liquidation, bankruptcy, etc. However, the liability of equity shareholders is limited to the amount of investment they have made.
5. Right shares and bonus shares: In case a company requires additional capital, it can issue ‘right shares.’ Issuance of ‘right shares’ makes it possible for the existing equity shareholders to preserve their ownership and control over the company as they receive priority from investing over other investors. 

Sometimes, companies also decide to issue bonus shares as free shares to the existing equity shareholders instead of dividends. 

What is meant by equity finance?

The term ‘equity finance’ refers to selling the stake in the business in return for a cash investment from the investors. Unlike loans, there is no repayment obligation on equity finance. Instead, investors invest in the equity shares of the particular company to earn returns in the form of a high dividend yield or capital appreciation and also by selling their shares at a higher price. 

Enlisting the benefits of equity financing

Following mentioned are some main benefits of equity financing:

• Freedom from debt: Equity financing allows the company to focus on its growth plans rather than figuring out ways to repay the amount of the loan. 
• More capital: Equity financing allows the company to raise larger amounts of money compared to the amount that debt finance can provide the company.
• Follow-on funding: Company can issue additional equity shares and thus, procure additional funding as it grows. 

Equity Funding

When it comes to equity funding, the equity investor can be anyone from the friends and family of the founder to the private equity house.

• Family and friends: The personal network of the company’s founder is one of the most common sources of early equity funding.
• Angel investment: Angel investors fall into the category of high—net worth individuals who use their money to invest in the company when the entity is in the early-stage business.
• Venture capital: Venture capital funds can be defined as the funds investing in the company with higher growth potential in return for a minority stake and thus, help the business accelerate its growth. 
• Corporate venture capital: Corporate venture capital, considered the subset of venture capital, is where the large firms invest in the smaller companies for earning financial returns.
• Private Equity: Private equity firms use to raise pools of capital so that they can invest in private companies and earn positive returns on their investment.
• Equity crowdfunding: Equity crowdfunding involves pitching business ideas on different crowdfunding sites so that a small sum of money can be raised from a large number of investors. 
• Government funds: Several government funds provide equity finance to the companies and earn a higher rate of returns. 

Conclusion

When talking about the investment in equity, it is referred to as the investors investing their funds in the equity shares issued by a particular company. The company procures long-term capital, and shareholders are offered returns in the form of dividend yield and capital appreciation in exchange for their investment. The above-mentioned article will help you clear all your doubts related to the concept of equity investment.