Equity is a part of a company, also known as stock or share. When you buy shares of a company, you basically own a part of that company. A company`s stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company. They buy the shares because they expect to profit when the company profits. There are two basic types of shares that any company issues: equity shares and preference shares.
A. Equity Shares
Both public and private corporations issue equity shares. Equity shareholders are the owners of a company and initially provide the equity capital to start the business.
Equity share ownership in a public company offers many benefits to investors. The following are some of its main advantages:
Capital appreciation
Dividends
Voting privileges
Liquidity – shares can easily be bought or sold
Dividend tax credit and capital gains tax
There are also a few drawbacks of owning equity shares. Although part owners of the business, common shareholders are in a weaker position. Senior creditors, bondholders and preferred shareholders have prior claims on the earnings and assets of a company. While interest payments are guaranteed to bond holders, dividends are payable to shareholders at the discretion of the directors of a company.
B. Preference Shares
A preference share is a type of share capital that generally enables shareholders to fixed dividends ahead of the company`s common shares and to a stated rupee value per share in the event of liquidation. Typically, the preferred shareholder occupies a position between that of a company`s creditors and its common shareholders.
As preferred shares have characteristics of both debt and equity, they provide a link between the bond and common equity sections of a portfolio. One shortcoming of preferred shares is that many are non-voting. However, after a specified number of preferred dividends are withheld, voting rights are usually assigned to preferred shareholders
Courtesy:
http://www.motilaloswal.com/Financial-Services/Knowledge-Centre/FAQs/Investment/Equity