What is Equity

Equity , share or stock are synonym and used frequently in finance industry. Equity in terms of investments is ownership in a business. Ownership represents claim in company’s assets and earnings but liable for losses too. It means you may lose your invested money if the company’s profit decline. Since equity is considered a permanent source of capital, company never pay backs your investment. But you can sell your share to any other interested party.  If you own shares thenyou also enjoy voting rights in key decisions of the company. As you buy more shares, your ownership increases in the business. Today we are living in digital world so our shares are stored in digit forms in our brokerage account.

Why a company offers equity?

It is a very interesting question that why someone offers shares of their own company to others. When we start a business, we need capital for business operation. Either to start a new business or to expand an existing business, we need capital. If a company needs funding, equity is offered to interested investors.

Why a company doesn’t go to bank for business loan but offers equity to others?

Remember that there is a big difference between a loan and a share. If we get a business loan from a bank, we need to return it with interest. Interest rate starts from the day one when a loan is approved and credited. Business owner is responsible to repay the loan based on the terms and condition. If the business doesn’t go as expected, then company’s assets could be on stake. But stock is a non-redeemable source of capital. Business owners are not liable to pay back to investors if business doesn’t perform well.

Now the question arises that why we should buy a stock if business owner is not liable for losses?

Well, buying a stock means owning a fraction of business. If business performs good, your investment grows and it could be exponential growth in some cases. It means your risk of ownership comes with a reward of growth. If you believe in the company’s business model, it could be a very good investment.

Apart from capital appreciation, company also pays dividends to its share holders based on the performance.

What is dividend ?

Stock holders have rights on company’s earning and residual income. Based on company’s performance, management may decide to share the profit with share holders. Please note that dividend is not mandatory and announced by management. Dividend could be either in the form of cash or stock. It means you may get cash amount or equivalent value of stocks of the company.

Apart from dividends, company may also offer to buy back stocks. The buy back offer could be higher than the initial purchase price and it could be very profitable for investors.

Should you invest in Equity or Debt ?

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One Comment on “What is Equity

  1. Pingback: Which is better?Equity or Debt - OnlineNisha.com

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