Equities, generally referred to as shares, are negotiable instruments issued by a corporation that represent a capital share of that corporation. Shares represent part ownership of a company. An investor that buys shares is therefore a part owner of the company that issued the shares and is entitled to a portion of the company's profits, paid out in the form of dividends. If a company has 1,000 shares and someone owns 50 shares, then he or she owns 5% of the company.
Shares offer considerable potential for capital growth and are long-term risk investments. There are two common types of shares that can be issued, ordinary shares and preference shares.
Ordinary Shares Ordinary, also known as common shares, provide the holder with voting rights and entitle him or her to a share of the company's success through dividends (when offered), capital appreciation and scrip. In the event of liquidation, ordinary shareholders have rights to a company's assets only after preference shareholders, as well as bondholders and other debt holders, have been satisfied.
Common shareholders sometimes enjoy what are called "preemptive rights." Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues new shares. This means that common shareholders with preemptive rights have the right, but not the obligation, to purchase as many new shares of the company as it would take to maintain their proportional ownership in the company.
Most of the equities listed on the NSE are ordinary shares (common shares), and such shares account for most of the turnover on the exchange.
Holders of Preference Shares are entitled to a preferential distribution of dividends prior to any distribution to the ordinary shareholders. Moreover, preference shares typically pay a fixed dividend, whereas common shares do not. Unlike common shareholders, preference shareholders usually do not have voting rights. In the event of a company bankruptcy, preference shareholders have a right to be paid from the company assets first.
There are four types of preference shares: cumulative preferred shares, which must pay out all dividends including skipped dividends; non-cumulative preferred shares, which do not pay out skipped dividends; participating preferred shares, which give the holder dividends plus, under certain conditions, extra earning; and convertible shares, which can be exchanged for a specified number of ordinary shares.