Introduction
In simple terms, shares that are issued by companies to raise capital is known as equity shares or ordinary shares. Equity shares represent the ownership units of a company. Investors are called shareholders and they acquire voting right and receive dividends.
Key Characteristics Of Equity Shares
* Shareholders become partial owner of the company
* Shareholders can vote at company's meetings
* Shareholders receive dividends from company's profit
* Equity shares are riskier than preference shares or debentures
Pros Of Equity Shares
The main advantages or benefits of equity shares can be pointed out as follows:
1. High Long-Term Returns Potential
One of the major advantages of equity shares is capital appreciation and high return potential over time. Equity shares can They can offer high returns than fixed deposit or bonds in the long run.
2. Regular Dividend Income
Shareholders receive portion of company's profits in the form of dividend. It provides steady income stream to the investors.
3. Ownership And Voting Rights
Equity shareholders become partial owners of the company when they buy shares. So, they can claim on company's profits and assets. They also get voting rights in company decisions.
4. Inflation Hedge
Company's share prices and earnings grow over time that helps to protect against inflation and preserve the purchasing power of shareholders.
5. Liquidity And Flexibility
Equity shares are more flexible than other investment options because they can be easily bought or sold on stock exchanges. Shares can be converted into cash quickly because they can be sold easily. So, ordinary shares are highly liquid.
Cons Of Equity Shares
The main drawbacks or disadvantages of equity shares are as follows:
1. Market Volatility
One of the notable risks of equity shares is extremely volatile share prices. Equity prices can be influenced by several factors such as global events, company issues, political reasons, market sentiment etc. So, there is high risk of short-term loss.
2. No Fixed Returns
Ordinary shares or common shares do not promise fixed dividends or returns. Dividends depend on the performance of the company and if company cannot perform well shareholders do not get any returns on their investment.
3. Limited Control
Although shareholders are partial owners of the company they have limited control over company's operations and decisions.
4. Requires Adequate Time, Research and Market Knowledge
Equity investment needs market trends, deep research, analysis of company's balance sheet etc. It also requires financial knowledge and regular monitoring. So, it requires more time, knowledge and research.
5. Residual Claim Risk
In case of liquidation, investors may get little or loss all of their investment. So, it is riskier than other investing options.
