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What are equity shares?

Equity shares definition

An equity share definition is: commonly referred to as an ordinary share or common stock, an equity share is an investable type of security issued by a company to the public. It gives partial ownership of a public company to a buyer, also known as a shareholder, who undertakes the entrepreneurial risk associated with a business venture. Holders of this type of shares are entitled to a portion of the company’s profits and get the right to vote on corporate matters, such as setting corporate policy, accepting takeover bids and electing the members of a board of directors. Speaking from a company’s perspective, equity shares are the main source of finance of a firm.

Where have you heard about equity shares?

When somebody is talking about the purchase of a company's stock, he or she is most likely referring to equity shares. You may have heard about them from financial news, investors, traders or financial advisers. Moreover, you may have seen some articles explaining the difference between equity shares and preference shares.

What you need to know about equity shares.

The roots of equity shares trace back to 1602 when they were established by the Dutch East India Company. Then, they were introduced on the Amsterdam Stock Exchange.

For a company to issue equity shares, it must first organise an initial public offering, or IPO. An IPO is a great way for a firm to get exposure to additional capital in order to develop and expand its business. Like other securities, equity shares are traded on the secondary market, also known as the stock market.

Commonly, there are two types of equity shares: one class of voting shares and another class of non-voting, or with less voting power, shares. The main idea behind issuing dual equity shares is to keep larger control over the company. However, despite the difference in voting rights, holders of different types of equity shares usually have the same rights to the company’s profits.

Apart from dividends, owners of equity shares profit from the capital appreciation of the security.

Equity shares are also called “common” shares to emphasize its difference from preference shares. The latter, also known as preferred stock, are the company’s shares that take precedence over equity shares regarding the repayment of dividend and capital. Therefore, if a company issued both types of shares, common shareholders do not get dividends until all preference shareholders are paid their dividends in full. Preference shares do not come with voting rights, however, offer more stability than equity shares as they have a fixed dividend rate.

In the event of a company’s bankruptcy, holders of equity shares own rights to the company’s assets. However, it is very unlikely that common shareholders will receive compensation in the case of a company's liquidation, as they are at the bottom of the priority ladder. They can only get remaining funds left after bondholders, creditors and preferred shareholders are paid in full. This makes equity shares riskier than preferred shares.

The upside to equity shares is that they usually outperform preference shares and bonds, as well as offering a higher return in the long term. 

Find out more about equity shares or ordinary shares.

Now that you know the equity shares meaning, it is time to learn more about shares trading. To do so, you can check out a free online trading guide provided by Capital.com.

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