Table of Contents
Equity
You have bought shares of any company in the stock market.
buy or buy equity in that company Must have heard about.
Before investing you should
Must understand:
- What is the structure of equity?
- What does equity or share mean?
For example:
- A private company XYZ Pvt. Ltd. has been formed.
- Private Limited Company has a manufacturing plant Decided to establish.
- It requires a further investment of Rs.1 lakh for setting up a manufacturing unit.
- Investment in the form of bank loans, or loans from friends can be obtained, or 100 could gather people and tell them, “We are 100 people. We are all in this company Will invest Rs 1000. From this, All the investment will come.”. We all 100 people Will have a 1% stake in the company.”
- This means that whatever profit will be made will be According to 1% of 100 people of the company Will be distributed from.
- If at the end of the year, the company has a turnover of Rs. Earns profit. 10 lakhs, then everyone gets Rs. Will get a profit share. 10,000 each (Rs. 10 lakh/100 people).
- It can be divided into equity, ownership, or company Known as a stake.
Any company whenever wants to raise investment can either take a loan or give a share of the company.
There are so many benefits of giving a share of the company.
Costliest Source of Finance
- Equity is the costliest source of finance for any company.
- This is because the company is distributing its share.
- The more share will be distributed; the owners will be left with fewer shares of ownership.
- As the shares of the owner decrease with the increase in the distribution of the equity, it is said that equity is the costliest source of finance.
Benefits of Equity for a Company
The benefits a company can have by raising equity by selling shares through IPO are as follows:
No fixed liability
No fixed liability
- When the company raises money from the market, it is not a fixed liability.
- You can raise money from the market without any security or property mortgage.
- You give people a share in the company.
- You do not have the fixed liability and complete responsibility for repaying the money.
- It does not mean that you have in mind not to return the money.
- You should have in mind to grow the funds raised from the public.
- This will help in building the confidence of investors in your company.
- They will further invest in your company.
For example:
- Earlier the share price of Jet Airways was Rs. 400.
- Now, its share price is Rs. 20.
- This is because the company became bankrupt.
- Now, the owners of the company do not have any value for the shares.
- You could not go to Mr. Naresh Goel that you want back the Rs. 400 on which you purchased the share of the company.
- You cannot ask for the additional interest on Rs. 400.
- You cannot do this because you have decided to purchase the share.
- If the share prices had increased to Rs. 700 from Rs. 400, then you would not have returned Rs. 200 to Mr Naresh Goel assuming that Rs. 500 is sufficient for you.
- In the case of high share prices, you would be proud of your idea of investment in Jet Airways.
So, if a company raises funds through equity, then it does not have to bear a fixed liability of returning the amount. It means it is okay if the money is not returned.
No need to pay interest:
- As you take a loan from the bank, you need to pay interest every month. The interest may be 10%, 12%, 15%, 18%, or 24%.
- You need not give any form of interest in the equity.
- If you are earning profits at the end of the company, then it is your discretion as a company whether you want to give some dividends to the shareholders or not.
- You can invest the profit back into the company to grow it.
- The shareholders or investors of the company will also be happy with the growth of the company.
Creates Liquidity:
- Whenever the company wants to raise money, it is available on the stock market.
- The company can sell its shares and quickly raise money.
For example:
- Mr. Mukesh Amabani needed to raise money; he quickly sold his shares to create liquidity and raised funds of approx. Rs.1.50 Lakh crore.
The owners of the company can also sell the shares and get the money.
The owners of the company may also feel that:
- They put in a lot of effort for a long time.
- Now, they need to encash Rs. 100 to 200 Crore at a particular time.
- So, the owners can also cash out.
For example:
- The house of Mr. Mukesh Ambani is of Rs. 8000 Crore.
- So, do you think that is possible with his Rs. 15 Crore yearly income?
- No, he might have sold some of his shareholdings of Reliance.
- He would have made that house with the money he received after selling the shares.
So, the owner can also cash out the shares to meet his other expenditures.
Creates investor base
- When so many investors get attached to the company, they come up with various proposals that they also want to do business with the company.
- A wide alliance can be developed if you have a good investor base.
Allows selling of the company
If in the future, you and your children do not want to do the business further, then you may sell the company.
For example:
- Mr. Kishore Biyani sold his company to Reliance Retail.
- The company was sold quickly because the company was listed on the stock exchange.
- The company shares have a share price.
- It made the valuation of the company easy.
- Suppose the number of shares of the company is 100 Crore.
- The price of 1 share is Rs. 50.
- So, the value of the company is Rs. 5,000 Crore.
Anybody can purchase the company by purchasing the open shares of the company in the stock market.
The above-mentioned were some excellent benefits for a company when it raises funds from equity as compared to debt.
Debt
In the debt you need to do the following:
- Pay fixed charge
- Mortgage assets, like some property
If you are not able to return the money, then all the assets mortgaged by you get auctioned by banks for recovery of debts.
Benefits of Equity for an Investor
The investors have the following 4 benefits:
Possibility of multi-fold returns
- It means if you invest Rs. 100 in a company, then it may rise to Rs. 1000 in the next 10 years due to a big jump in the share price.
- If the money is invested in FD, then it will give only 5% -6% of the yearly return.
- If you keep the money invested for at least 10 years in the share market, then it has been time and again proved that shares of the good company provide 15%-25% of the yearly return.
Helps beat the inflation
- You can earn multi-fold returns from investment in shares, so you can beat inflation also.
- Inflation is the lion that is running after your investments very fast.
- If the FD return rate is 5%-6%, then your investments have been eaten by a lion because the inflation rate is 10%.
- To beat inflation, your investments should give better returns.
- It is possible to beat inflation by investing in the stock market.
- If you cannot directly invest in the share market, then invest through mutual funds.
Creates long-term wealth
- In FD suppose you invest Rs. 100 and get Rs. 5 as a return at the end of the year. You generally spend the money received as interest.
- In equity, the share price keeps on increasing and this creates the long-term value of your investment or wealth.
10% tax rate on gains
- Whatever income you earn either from business or salary, a top bracket earner needs to pay 35% -36% taxes in India.
- If you will earn value by long-term creation like you purchased shares of a company and held it for more than 1 year and sold after that, then you need to pay only a 10% tax on the gains.
- You have a good chance to save tax because on your whole income, you need to pay almost 36% of tax whereas in long-term capital gains, you need to pay only 10% tax and that is only on gain.
For example:
- You purchase a share for Rs. 100.
- It sold for Rs. 150.
- Then you need to pay tax on the gain which is Rs. 50.
- It means only Rs. 5 tax you are required to pay.
- How can I buy equity shares?
- Investors can buy equity shares through stock exchanges, brokers, or online trading platforms.
- What risks should I consider before investing in equity shares?
- Risks include market volatility, economic fluctuations, and company-specific risks affecting stock prices.
- Do equity shares always guarantee profits?
- No, equity shares are subject to market risks, and profits depend on company performance and market conditions.
- Can equity shares lose their value?
- Yes, market forces, company performance, and economic factors can cause equity shares to lose value.
- Are dividends from equity shares guaranteed income?
- Dividends depend on company profits and board decisions, and they are not guaranteed.