Study Guides/Commerce/What is Equity Share
Study Guide · Commerce

What is an Equity Share? (Stock Market & Commerce)

When you watch financial news or study Commerce (Business Studies/Accountancy), the word 'Equity' is everywhere. If a massive company like Reliance or Tata needs thousands of crores to build a new factory, they can't just ask a bank. Instead, they divide their company into millions of tiny pieces and sell them to the public as Equity Shares.

Question (Click to Flip)

What is the difference between Equity Shares and Preference Shares?

Answer

Preference Shareholders are VIPs. They get a fixed, guaranteed dividend every year, and if the company goes bankrupt, they get their money back before equity shareholders. However, the trade-off is that Preference Shareholders have zero voting rights.

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Key Facts

In the event that a company goes totally bankrupt and has to sell all its assets to pay off debts, Equity Shareholders are the absolute last people in line to get their money back. The banks, employees, and preference shareholders will always be paid first!

The Definition of Equity Share

An Equity Share (also known as an Ordinary Share) represents a tiny fraction of ownership in a company. When you buy an equity share, you legally become a part-owner (shareholder) of that specific company.

  • If you buy 1% of a company's total equity shares, you essentially own 1% of the entire company, its factories, its profits, and its brand value.

The Power of Voting Rights

The biggest and most important feature of an Equity Share is that it gives the shareholder Voting Rights.

  • Because you are a part-owner, the management cannot make massive decisions (like firing the CEO or selling the company) without asking you.
  • At the company's Annual General Meeting (AGM), you have the right to vote on major decisions. (1 Share = 1 Vote).

The Risk and Reward (Dividends)

Owning equity shares is highly risky but potentially very rewarding.

  • No Guarantee: Unlike a bank FD, a company is never legally forced to pay you a fixed interest. If the company suffers a massive loss, you get absolutely nothing, and the value of your shares crashes.
  • The Reward (Dividend): If the company makes a massive profit, the directors may decide to distribute a chunk of that cash profit directly into the bank accounts of all the shareholders. This cash bonus is called a Dividend.

Questions and Answers

What is the difference between Equity Shares and Preference Shares?+

**Preference Shareholders** are VIPs. They get a fixed, guaranteed dividend every year, and if the company goes bankrupt, they get their money back *before* equity shareholders. However, the trade-off is that Preference Shareholders have **zero voting rights**.

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