An equity share, also commonly known as a common share or ordinary share, represents a unit of ownership in a company. When you purchase equity shares, you become a part-owner of that business. A practical example clearly illustrates how these shares function and how investors can benefit.
A Concrete Example of Equity Shares: The ABC Company Investment
Consider a scenario where an individual invests in a company's equity shares:
For example, let's say that you buy 100 shares of ABC at INR 100 per share and invest a total amount of INR 10,000.
This initial transaction represents the purchase of equity shares. Here's a breakdown of the investment:
| Detail | Value |
|---|---|
| Company | ABC |
| Shares Purchased | 100 shares |
| Purchase Price/Share | INR 100 |
| Total Initial Investment | INR 10,000 (100 shares * INR 100/share) |
A few months later, the market dynamics shift:
A few months later, some policy changes announced by the government make investors feel positive about the future of the company. Hence, the demand for shares increases and the price reaches INR 150.
This part of the example highlights a key characteristic of equity shares: their value can fluctuate based on market sentiment, company performance, and external factors like government policies. When demand increases, the share price tends to rise.
If you were to sell your shares at this new price, your investment outcome would be:
| Detail | Value |
|---|---|
| Selling Price/Share | INR 150 |
| Total Sale Value | INR 15,000 (100 shares * INR 150/share) |
| Profit (Capital Gain) | INR 5,000 (INR 15,000 - INR 10,000) |
This scenario perfectly demonstrates how equity shares offer investors the potential for capital appreciation, which is the profit made from selling shares at a higher price than their purchase price.
Key Characteristics Illustrated by the Example
The ABC Company example showcases several fundamental aspects of equity shares:
- Ownership Stake: By buying shares, you acquire a proportional stake in the company.
- Market Price Volatility: The value of equity shares is not static; it changes based on supply and demand, company news, industry trends, and economic conditions.
- Potential for Capital Gains: Investors primarily seek to profit from an increase in the share price, as shown by the profit of INR 5,000 in the example.
- Liquidity: Equity shares are generally liquid assets, meaning they can be easily bought or sold on a stock exchange.
While this example focuses on capital appreciation, equity shareholders can also benefit from dividends (a portion of the company's profits distributed to shareholders) and voting rights, which allow them to influence company decisions.
