What Are Equities? Types, Benefits, Risks and How to Invest

Equities, often called stocks or shares, are one of the most popular ways to invest money and build wealth over time. If you're new to investing, you might be wondering, What are equities? This guide will break it down for you in simple, easy-to-understand language.

Meaning of Equities

The meaning of equity is quite straightforward. When you buy equity in a company, it means you’re purchasing a small ownership stake in that business. If the company does well, you get a share in its profits. These profits may come in the form of dividends or through a rise in the stock's value.

Equities are usually traded on stock exchanges, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) in India. People often refer to equities as "stocks" or "shares," and while there are slight technical differences, they’re generally used interchangeably in everyday conversations.

Types of Equities

Equity represents ownership in a company, but not all equities are the same. In India, companies can issue different types of equity instruments depending on their capital structure, investor needs, and regulatory framework. Here's a breakdown of the main types of equities used in India:

1. Equity Shares (Common Shares)

These are the most widely issued and traded type of shares in India.

• Represent ownership in the company.

• Come with voting rights.

• Eligible for dividends (not guaranteed)

• Listed on stock exchanges for public trading

2. Preference Shares

These shares provide a fixed dividend and have priority over equity shares in profit distribution and asset repayment.

• Do not usually carry voting rights.

• Include types like cumulative, non-cumulative, redeemable, and convertible preference shares.

• Regulated under the Companies Act, 2013

3. Convertible Preference Shares

A hybrid instrument that offers fixed returns with the option to convert into equity shares.

• Can be converted into equity shares after a specified period or upon trigger

• Offers flexibility to investors seeking capital appreciation and fixed income

4. Redeemable Preference Shares

These shares are issued with a clause allowing the company to buy them back after a certain period.

• Must be redeemed within 20 years (exceptions apply)

• Commonly used in financing arrangements.

5. Differential Voting Rights (DVR) Shares

Also known as dual-class shares, these offer varied voting rights compared to regular equity shares.

• Often carries lower voting power.

• May offer higher dividends as compensation

• Allowed under SEBI regulations, though not widely used

6. Founders' or Promoters’ Shares

While not a separate legal category, these refer to shares held by the company’s founders or promoters.

• Usually carry the same rights as equity shares.

• Often comes with significant control over company decisions due to high ownership.

7. Employee Stock Options (ESOPs)

A form of equity compensation granted to employees.

• Usually subject to vesting periods and performance criteria

• Encourages employee ownership and alignment with business goals

• Taxed and regulated under SEBI and income tax laws

8. Restricted Shares

These are shares issued to insiders or employees that come with restrictions on transfer or sale.

• Not freely tradable until conditions are met

• Common in startup equity plans or during M&A transactions

Note: Treasury shares—common in markets like the US—are not allowed in India. Indian companies must cancel shares bought back under SEBI’s buyback regulations.

Understanding the different types helps you build a diverse equity portfolio that matches your financial goals and risk tolerance.

How the Equity Market Works?

The equity market is where shares of companies are bought and sold. It connects buyers and sellers through stock exchanges. Here's a simple overview of how the equity market works:

• Companies list their shares through an Initial Public Offering (IPO).

• Investors buy these shares through brokers.

• Once listed, shares can be bought or sold in the secondary market (the stock exchange).

• Prices change based on demand and supply, news, performance, and market trends.

The equity market plays a key role in the economy by helping businesses raise capital and offering individuals a way to grow their wealth.

Benefits of Investing in Equities

Investing in equities can offer several benefits:

• High Returns: Equities have historically provided higher returns compared to other investments like fixed deposits or bonds.

• Ownership: Buying shares means you own a part of the company.

• Liquidity: Equities can be easily bought and sold on the stock exchange.

• Dividends: Some companies reward shareholders with regular income.

• Wealth Creation: Long-term investing in equities can help you build significant wealth over time.

Risks of Investing in Equities

While the rewards can be high, there are also risks of investing in equities:

• Market Volatility: Stock prices can rise or fall quickly based on market conditions.

• Company Risk: If a company performs poorly, its share price can drop or become worthless.

• Economic Factors: Inflation, interest rates, and global events can affect market performance.

• Emotional Decisions: Many investors lose money by buying or selling based on fear or greed.

Managing these risks is key to becoming a successful investor. Diversification, research, and a long-term view can help protect your equity portfolio.

How to Invest in Equities?

Wondering how to invest in equities? Here’s a step-by-step guide:

1. Open a Demat and Trading Account – This is where your shares are stored and traded.

2. Choose a Broker – Pick a reliable brokerage firm or app that suits your needs.

3. Do Your Research – Learn about the company, its financials, and the sector it operates in.

4. Start Small – Begin with a small amount and invest more as you gain confidence.

5. Diversify Your Equity Portfolio – Spread your money across different sectors and market capitalisation to reduce risk.

6. Invest Regularly – Consider a systematic investment approach to average out the cost.

7. Stay Informed – Keep an eye on market trends and company updates.

You can also invest through mutual funds if you prefer a hands-off approach. Equity mutual funds pool money from investors to buy a diversified portfolio of shares managed by professionals.

Conclusion

So, what are equities? In simple terms, they are a way for you to become a part-owner of a company and share in its growth. Whether you're looking to save for the future, generate returns, or beat inflation, investing in equities could be a smart move. Just remember to understand the risks, do your research, and stay patient.

Whether you're building your first equity portfolio or exploring the equity market for new opportunities, the key is to keep learning and invest wisely.