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What are Equity Shares?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 September 2016
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Equity shares represent the majority of shares in the financial market. This type of stock, which is sometimes referred to a ordinary stock or shares, is used to claim part ownership of a business. Owning equity shares gives a shareholder a claim on company profits and voting rights equal to the amount of shares owned. There are some risks involved in buying equity shares, as they only pay out if the company is successful or if any assets remain after creditors and preferred stockholders dismantle a failed company.

When a company wants to expand, it has the option of doing so through debt or equity financing. Debt financing involves taking out loans and issuing bonds to raise money in return for a promise to repay investments. Equity financing involves issuing shares, which essentially divides the ownership of the company. Equity shares represent the piece of the company owned by the shareholder; unlike bonds or loans, shares do not guarantee repayment of initial investment.

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One of the benefits of equity shares is the right to vote. Companies that use equity financing tend to operate through a board of directors that runs the day-to-day operations of the business. The job of the board is to make the company as profitable as possible. If shareholders believe the board is doing a bad job of managing the business, they can vote them out of office. The board and shareholder relationship does not give shareholders direct power over business decisions, but does afford shareholders some influence in the direction of the company.

Equity shares guarantee shareholders a right to a portion of the profits of the business; in effect, buying these shares is gaining ownership over the profits, rather than the buildings, desks, chairs, or products that make up a business. If the company is not profitable, shareholders may not make any money on their shares, but they are not liable for the failure of the company. Since most equity shares are limited liability, the IRS or creditors cannot come after shareholders if the business fails. On the other hand, since there is no guarantee of a repayment for an initial investment in equity shares, shareholders do stand to lose all of the money invested in the shares if the company shuts down.

Most equity shares are traded through stock exchanges, which operate both in physical locations and through virtual trading floors. Shareholders may buy, sell, and trade stock with one another on a daily basis should they so desire, though many prefer to find a reasonably profitable investment and stick with it. The stock market is extraordinarily complex, leading many people with significant investment portfolios to leave investment decisions to a financial manager or full service broker. Those who choose to educate themselves in the world of bears, bulls, and trading floors may try to cut out the middleman by choosing their own trades.

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