Equity in a company’s shares refers to the monetary value of a company’s stocks that have been bought after investment. The value of equity can be estimated by subtracting the value of liabilities of a company from the value of its assets. In other terms, equity represents the sum of money that shareholders will get if all of the assets of the company were liquidated and the entire debt of the company is paid off.
How does equity work?
By investing in equity shares, one gets partial ownership in the firm and these owners of the shares are called shareholders. A shareholder is entitled to voting rights in company matters and the appointment of the Board of Directors. Investors earn profit through stock price appreciation and may face losses in case of poor performance of stocks.
They enjoy a “limited liability” advantage, which means that their liability is only limited to the value of shares they have invested in and is not affected by the losses that are faced by the company.
How to invest?
Equity can be bought in (a) Primary & (b) Secondary Market. Primary equity market shares can be bought when a company releases its IPO (Initial Public Offering). Once the IPO is closed, shares can be bought in the stock exchange where the company is listed, through a broker. This is referred to as a secondary market. There are various options for investing in equity funds, these include, mutual funds, shares, and futures & options.
A certain risk is involved in investment but investing in equity has numerous benefits. It shields one against inflation, as during inflation the investment leads to higher returns. Moreover, the investor can generate a stable income from dividends and earn tremendous profits in the long run. Additionally, equity shares can easily be liquified and traded for cash in times of need.