Equity and Equity Capital
Stock market is an investment opportunity that can offer both high risks and high returns. Capital is the money required to run a business. When a business wishes to expand or commercialize a new product or service, it needs to raise capital.
Capital can be raised in 2 ways -
Debt: This is the borrowed capital
Equity: This is the company’s own capital
Equity capital represents ownership capital. Equity shareholders collectively own the company. They bear the risk and enjoy the rewards of ownership. The potential rewards and the downsides of equity shares make this an exciting, attractive and at the same time a risky proposition for investment.
In financial markets, the stock capital or equity capital of a corporation or a joint stock company is the capital raised through the issuance, sale, and distribution of shares. A person or organization that holds at least a partial share of stock is called a shareholder.
Types of Share Capital
The share capital or stock capital exists in 2 forms:
Ordinary Shares: Ordinary shares or Common stock is the most usual and commonly held form of stock in a company. Common stock holders typically have voting rights in corporate decision matters. In order of priority for receipt of their investment in the event of liquidation of a corporation, the owners of common stock are the last.
Preferred Shares: These have priority over common stock in the distribution of dividends and assets. Most preferred shares do not provide voting rights in corporate decision matters. However, some preferred shares have special voting rights to approve certain extraordinary events such as the issuance of new shares, the approval of the acquisition of the company, or to elect directors.
Classification of equity shares
Blue chip shares: Shares of large, well established companies with an impressive track record
Growth shares: Shares of companies with fairly entrenched position in a growing market with higher profitability and growing market share than the average
Income shares: Shares of companies with fairly stable operations, relatively limited growth opportunities and high dividend payouts.
Speculative shares: Shares that tend to fluctuate widely as there is a lot of speculative trading between them