Introduction to the Basics of Equity

Investment in equities refers to the buying and holding of shares by individuals or organization may be mutual funds or institutional investors with the expectation of warning some return either in form of capital gains/ increase in the prices of stock or dividends. The equity owners are owner of the company of which equity shares the owners have. In other words it also refers to equity (ownership) participation in a public company, or private (unlisted) company, or a start-up (a company being created or newly created).

Equity shareholders are the owners of the company, sharing its risks, profits, and losses. They have voting rights, and a residual claim on the earnings and assets of the company, depending on their holdings. Shareholders have liability only to the extent of their holding. Their fortunes depend on the growth of the company: if the company prospers, the equity shareholders will be the greatest gainers. They are entitled to dividends and other benefits that the company may announce from time to time. At the same time, there is no guarantee of a return on their investments.

The value of a company increases in tandem with the rise in its assets and cash accruals. This, in turn, will drive the value of its stock. Positive news about future growth/expansion of the company tends to impact stock price favourably.

By these routes one can buy the shares from the market:

  • Initial Public Offering (IPO) or Primary Market: When a company issues its share for the first time, the issue is called the initial public offering.
  • Secondary Market: The investor can buy shares from the secondary or stock exchanges of a listed company.
  • Right Issue: Company may be issuing more shares in the market to existing shareholders on the basis of the holdings of the investors.
  • Further Public Offering: A listed company may be offering shares in the primary market. The investors have options to buy from here.

An IPO is the company’s first listing of its common stock on a stock exchange. In this case, an investor buys the stock directly from the issuer, the company from the primary market. An investor can also buy/sell a listed company’s shares from stock exchanges such as BSE or NSE. An exchange is also called the secondary market because in this case, one buys/sells stocks from other investors.

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