{"id":5755,"date":"2021-11-17T19:34:38","date_gmt":"2021-11-17T14:04:38","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=5755"},"modified":"2022-05-24T10:23:58","modified_gmt":"2022-05-24T04:53:58","slug":"what-is-equity","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/what-is-equity\/","title":{"rendered":"What Is Equity \u2013 Definition, Features, Types, Advantages"},"content":{"rendered":"\n<p>Equity is an <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-asset-allocation\/?utm_source=blog&amp;utm_medium=article\">asset class<\/a> that has the highest potential for reward but also bears the highest inherent risk quotient. Investors who are risk-averse are generally told to stay away from \u2018equity\u2019. However, with easy access to information and a plethora of investment option availability, investors are no longer shying from taking some exposure to the equity segment.&nbsp;<\/p>\n\n\n\n<p>In short, equity represents the stake of <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/?utm_source=blog&amp;utm_medium=article\">shareholders<\/a> in a company, gained through <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-buy-share\/?utm_source=blog&amp;utm_medium=article\">purchasing shares<\/a> issued to investors upon the company\u2019s listing in the <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/\">stock market<\/a>.\u00a0Let&#8217;s find out what is equity and explore the types of equity in detail.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#What-is-equity\" title=\"What is equity?\">What is equity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Features-of-equity\" title=\"Features of equity\">Features of equity<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Limited-liability\" title=\"Limited liability\">Limited liability<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Voting-rights\" title=\"Voting rights\">Voting rights<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Redemption\" title=\"Redemption\">Redemption<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Types-of-equity\" title=\"Types of equity\">Types of equity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Downsides-of-equity\" title=\"Downsides of equity\">Downsides of equity<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Highly-risky\" title=\"Highly risky\">Highly risky<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Associated-with-performance\" title=\"Associated with performance\">Associated with performance<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Impact-of-socio-political-changes\" title=\"Impact of socio-political changes\">Impact of socio-political changes<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Liquidation\" title=\"Liquidation\">Liquidation<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-equity\"><\/span>What is equity?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Equity is issued to investors to raise the capital required to start, grow and expand businesses. In lieu of their contributions towards the company, investors are offered a stake in the company (in proportion to their investments).&nbsp;<\/p>\n\n\n\n<p>The status of those who <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in equities is that of an owner. They receive certain rights that enable them to participate in the company&#8217;s growth and receive their share of earnings as dividends and capital gains in the future. The entire worth of any company is divided into small portions, and the smallest piece is called equity.&nbsp;<\/p>\n\n\n\n<p>In case a company goes into liquidation, and all assets held by the company are realized, then after all the external liabilities are paid off, equity is the amount each shareholder will receive against their investments.&nbsp;<\/p>\n\n\n\n<p>Mathematically equity is expressed as:<\/p>\n\n\n\n<p><strong>&nbsp;A = E &#8211; L<\/strong><\/p>\n\n\n\n<p>Where:<br><strong>A<\/strong> represents the total assets of the company<br><strong>E<\/strong> represents equity<br><strong>L<\/strong> represents the total liabilities to be met by the company.&nbsp;<\/p>\n\n\n\n<p>Even in real market scenarios, huge losses incurred by the company have wiped off the owner&#8217;s equity.&nbsp;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"features\"><span class=\"ez-toc-section\" id=\"Features-of-equity\"><\/span>Features of equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Limited-liability\"><\/span>Limited liability<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>No matter what, equity investors are only liable to the company&#8217;s equity stake. They cannot be asked for anything else than the equity capital they hold. Even in the most extreme liquidation situation where assets are falling short of the liabilities, equity holders cannot be asked to bring the shortfall amount.&nbsp;<\/p>\n\n\n\n<p>In most cases, companies don&#8217;t ask for the entire value of equity upfront. The remaining is asked as and when needed. The equity holders are only liable to pay these calls when asked for by the company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Voting-rights\"><\/span>Voting rights<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Equity holders are part-owners of the company and thereby have rights to participate in the company&#8217;s affairs through voting rights bestowed upon by the company. Voting rights are assigned in proportion to the number of <a href=\"https:\/\/www.tickertape.in\/blog\/shares\/?utm_source=blog&amp;utm_medium=article\">shares<\/a> held in the company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Redemption\"><\/span>Redemption<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Now, there&#8217;s no guarantee to that! Equity owners might get exponential unrealized <a href=\"https:\/\/www.tickertape.in\/blog\/capital-gain-tax-on-shares\/?utm_source=blog&amp;utm_medium=article\">capital gains<\/a> and regular flow of income if the company does well and makes profits. Or on the contrary, stakeholders might end up realizing their investment in losses if the company makes losses, the <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-market-sentiment-and-how-to-analyse-it\/\">market sentiment<\/a> becomes negative or the company goes into liquidation.&nbsp;<\/p>\n\n\n\n<p>There is no fixed maturity period for equity investments. Equity, once issued, is permanent and the company can only claim it back at the time of liquidation of the company. The company can however make requests through a process called <a href=\"https:\/\/www.tickertape.in\/blog\/buyback-of-shares\/?utm_source=blog&amp;utm_medium=article\">buyback of shares<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"types\"><span class=\"ez-toc-section\" id=\"Types-of-equity\"><\/span>Types of equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Though there are different kinds of equity, one thing that is common between them is that all of them are market securities. Hence, the returns, incidentally, are not fixed but fluctuating.<\/p>\n\n\n\n<p><strong>Common stock: <\/strong>Whether privately-owned or publicly owned, the capital of each company is divided into fractions and the smallest fraction is called a share. <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/?utm_source=blog&amp;utm_medium=article\">Shares<\/a> collectively are called common stock\/common shares.<\/p>\n\n\n\n<p>Investing in common stock gives proportional part-ownership to the investors. However, returns on common stock are directly linked with the financial performance of the company and the performance of the stock in the <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-invest-in-shares\/?utm_source=blog&amp;utm_medium=article\">stock market<\/a> if the company is listed. A part of the profits earned by the company is distributed among the common <a href=\"https:\/\/www.tickertape.in\/blog\/shareholders\/\">shareholders<\/a> in the form of dividends.<\/p>\n\n\n\n<p><strong>Preferred stock: <\/strong>Preferred stock also remarks ownership in the company, however, the same doesn&#8217;t carry voting rights, i.e., the preferred stockholders have no say in the affairs of the company. They enjoy preference over common stockholders in payment of dividends as well as dues in case the company is forced into liquidation.<\/p>\n\n\n\n<p><strong>Retained earning: <\/strong>That portion of the current year post-tax profits which is not paid out as <a href=\"https:\/\/www.tickertape.in\/blog\/dividend-yield\/?utm_source=blog&amp;utm_medium=article\">dividends<\/a>, and is retained in the business for future needs is called retained earnings. This money is often held with the company to meet emergencies, however, the company may use this money for its expansionary motives or any other purpose it may deem fit.<\/p>\n\n\n\n<p><strong>Treasury stock: <\/strong>When the issuing company buys its shares from the common stockholder to realign their outstanding shares, the shares repurchased are held by the company as treasury stock. Treasury stock reduces the equity capital of the company, and thus the company is relieved from paying dividends on such shares.<\/p>\n\n\n\n<p>Lastly, <a href=\"https:\/\/www.tickertape.in\/blog\/mutual-funds\/\">mutual funds<\/a> are the table toppers when it comes to generating decent returns on equity while mitigating risk. <a href=\"https:\/\/www.tickertape.in\/blog\/equity-mutual-funds\/?utm_source=blog&amp;utm_medium=article\">Equity-oriented mutual fund<\/a> investments invest 60% or more of their portfolio in the equity markets. While the risks are on the higher side, the returns follow the higher trajectory as well.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"downsides\"><span class=\"ez-toc-section\" id=\"Downsides-of-equity\"><\/span>Downsides of equity<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Highly-risky\"><\/span>Highly risky<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Equity is an instrument where you can lose your entire capital within a short time. Your corpus is exposed to the fluctuations of the market, and there&#8217;s no guarantee for returns. While its risk-to-reward ratio is impressive, not every investor may have the stomach to digest the risks.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Associated-with-performance\"><\/span>Associated with performance<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The fate of your investments is decided by the performance of the market, sector, and, more importantly, the stock. If the mood of the market is negative or the stock performs poorly, you may end up eroding your capital.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Impact-of-socio-political-changes\"><\/span>Impact of socio-political changes<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Political and social matters impact the market significantly. For example, if the government announces a corporate tax cut or on the contrary increases it, your equity investments may exhibit like-to-like movement. The opening of 100% <a href=\"https:\/\/www.tickertape.in\/blog\/how-do-fdi-fpi-and-fii-differ-from-each-other\/?utm_source=blog&amp;utm_medium=article\">FDI<\/a> can be taken as a good example here.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Liquidation\"><\/span>Liquidation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Every time a company is forced into liquidation, equity shareholders are paid at last. Moreover, the shares don&#8217;t fetch their <a href=\"https:\/\/www.tickertape.in\/blog\/market-value\/?utm_source=blog&amp;utm_medium=article\">market value<\/a> at the time of liquidation. Hence in case of liquidation, investors will have to bear losses.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The concept of equity is of sweeping nature and covers every possible way a company can raise capital. Investing in equity brings ownership rights among other laudable benefits ranging from voting rights to dividends. However, the type of equity to invest in will largely depend on the investment time frame and purpose of investment.<\/p>\n\n\n\n<p>From an investor&#8217;s point of view, <a href=\"https:\/\/www.tickertape.in\/blog\/equity-investment\/?utm_source=blog&amp;utm_medium=article\">equity investments<\/a> are a great source of regular income in the form of dividends coupled with capital gains that can be reaped in the long term.<\/p>\n\n\n\n<p class=\"has-text-align-center\"><em>Before you go, we\u2019ve got something special for you! On the occasion of Diwali 2021, we are gifting you a free <a href=\"https:\/\/www.tickertape.in\/blog\/tickertape-pro-features-for-advanced-investment-analysis\/\">Tickertape Pro<\/a> upgrade. It\u2019s&nbsp;<a href=\"https:\/\/chat.smallcase.com\/smallcase\/messages\/@adithya.vijayaraghavan#\" rel=\"nofollow noopener\" target=\"_blank\">#dimaaglaganekamuhurat<\/a>! All you have to do is just sign up on&nbsp;<a href=\"https:\/\/www.tickertape.in\/?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Tickertape<\/a>&nbsp;and avail the offer. Go on, claim your free account now!<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Want to know about equity stocks and how they work? Click here to read more about equity investments, pros &#038; cons and their different types.<\/p>\n","protected":false},"author":45,"featured_media":5217,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[9],"tags":[254,1001,1000],"acf":[],"modified_by":"Anjali Chourasiya","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/10\/new1-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5755"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/45"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=5755"}],"version-history":[{"count":3,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5755\/revisions"}],"predecessor-version":[{"id":8492,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/5755\/revisions\/8492"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/5217"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=5755"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=5755"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=5755"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}