When you buy shares of a company, you gain ownership in that company. A share is the smallest portion of ownership you can acquire.
Companies raise money in two ways: debt and equity. Unlike debt, when a company raises money through equity, it does not need to repay you. When you want your money back, you can sell your shares in the stock market.
You can trade company shares on stock exchanges like NSE and BSE.
Your returns depend on the company's performance. If the company performs well, the value of its shares increases and you benefit. If it underperforms, you share the risk.
Types of equity
Private equity
Venture capitalists and private equity firms hold private equity. Retail investors cannot access this type.
Public equity
Public equity includes shares of companies listed on stock exchanges. You can buy and sell these shares through an IPO or on the secondary market. The company's equity enters the primary market through the IPO. After the IPO, all subsequent trades comprise the secondary market.
Other equity types
- Employee equity (ESOPs) : Employees receive the option to buy company shares at a fixed price.
- Sweat equity : Companies directly issue shares to employees for their contributions, without giving them a choice.
- Founder equity : This represents the portion of company ownership that remains with the founder(s). Investors often use this metric to assess how involved the founder(s) are with the company.
You can buy and sell public equity, which includes shares of companies publicly listed on stock exchanges. Common and preferred equity are types of public equity that you can trade, but only if the company issues these specific types.
How equity works
Equity represents ownership. When a company divides its ownership into shares, each share represents a portion of the company. When you buy a share, you own a part of the business.
Example: You buy 10 shares of Nestlé (the company that makes Maggi) for ₹100 each. If the company performs well and the share price increases to ₹120, your investment grows in value. If the company underperforms and the share price drops to ₹80, your investment value decreases.
This movement in share prices makes equity both exciting and sometimes risky.
Benefits of investing in equity
- Capital appreciation : Your investment grows when the company grows.
- Dividend income : Some companies share their profits with shareholders as dividends.
- Beating inflation : Equity has the potential to deliver returns that outpace inflation, helping you maintain your money's value over time.
- Diversification : You can spread your risk by investing in different sectors, so one underperforming investment does not affect your entire portfolio.
Risks involved in equity investments
- Market risk : Your investment can drop if the company underperforms.
- Volatility risk : Share prices can fluctuate daily, which can be unsettling for some investors.
- Liquidity risk : Some stocks do not have enough buyers or sellers, making them difficult to trade.
- Concentration risk : Investing all your money in one stock or sector can backfire if that area underperforms.
You can manage these risks with the right strategies and by diversifying your portfolio.