Equity Market
Meaning of equity
Equity in finance refers to the ownership of investors in a business and represents the amount they would receive after liquidating assets and paying off debts such as debt. It is calculated as the difference between assets and liabilities shown on a company’s balance sheet.
When an investor invests in the shares of a company, that investor becomes the owner of the net assets of the company
in proportion to the shares held by that investor. The formula for calculating equity is presented below:
Equity = Assets – Liabilities
Equity includes the share capital
, the income statement
the balance, the other comprehensive income statement
, as well as any reserves or surpluses
.
The shareholder’s profit from the capital gains and
capital gains due to the rise in stock market prices. They also have the right to vote in important company decisions. However, investing in stocks comes with certain risks.
Features
A shareholder of a company is only reimbursed in the event of liquidation
and also to the extent of the surplus available after having satisfied all obligations and preferred shareholders.
Shareholders have the right to vote and to participate in general meetings of the company.
Shareholders are entitled to receive dividends
. However, it depends on company policy whether the dividend is to be paid for a year or not.
Shareholders have limited liability
and are not required to pay any additional amount even at the time of liquidation
How does it work?
When an individual or any other investor invests in the shares of a company, he becomes a shareholder and acquires ownership of the capital of the company to the extent of the shares he holds.
The shares have no redemption date and it is only at the time of liquidation that the shareholders are reimbursed to the extent of the residual resources available. Shareholders can transfer their shares and the person to whom these shares are transferred becomes the new shareholder of this proportional share.
In the financial statements of a
company, it can change due to various factors such as variation in realized and unrealized profits, issuance of new share capital, repurchase
of existing share capital, declaration of dividends
and so on.
Why is equity important?
Equity is not only beneficial for the investor, but also for the issuing company. For the investor, it helps to get a high rate of return on their investment through capital gains and get proportional ownership of that business.
For the issuing company, equity provides the amount of capital necessary to start or continue its activity because the required capital is broken down into small portions which are then purchased by the investor.
Advantages
High rate of return: Allows the investor to get a high rate of return
on his investment when he owns the business. They will get a return on a capital gain or an appreciation of the shares.
Profits at the time of inflation: The rate of return an investor gets on stocks is usually higher than the rate of inflation
, so the investor’s purchasing power increases.
Simple process: The process of investing is relatively easy compared to investing in other types of investments, as the investor has to find the right broker and the rest of the work will be done by the broker.
Disadvantages
Higher risk: The risk associated with stocks is greater than that of investing in other investments.
Dependence on the performance of the company: the investor has no control over the work or the performance of the company and, if the company suffers a loss, the loss would be borne by the shareholder
Important point
Capital is very important for the investor because it shows the value that is attributed to him in the business. Ownership of capital makes him the owner of the company’s equity.
It also allows the shareholder to enjoy the right to vote and to participate in meetings relating to the business of the company. This increases shareholder interest in the company.
