Definition of Equity Share

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Equity share is a term thatcan be used in several different contexts, each with different meanings. It is therefore important to specify the intended meaning whenever using the expression. It is most commonly associated with stock in a company, particularly common stock. It can also refer to part ownership of a company that is not publicly traded, as well as being the name of a particular type of mortgage.

Stocks

  • The most common meaning of equity share is simply the shares in a company that can be bought and sold on stock markets. In the United States, "share" is used for an individual share, while the plural is more commonly known as stock.

Equity vs. Debt

  • The use of the term "equity share" reflects the fact that stock is classed as an equity security. This means that the person holding an equity share owns part of the company that issued it. This contrasts to debt securities such as bonds in which there is no ownership, but, instead, the holder has the right to receive an agreed sum of money at some time in the future.

Common and Preferred Stock

  • The term "equity share" is usually used to specify common stock, also known as ordinary stock. This differs from a type of stock known as preferred stock. The exact differences vary from company to company, but generally preferred stock is first in line for any dividend payments, and owners of preferred stock get priority ahead of other creditors if the company is liquidated. In most cases, only ordinary stock carries voting rights. Preferred stock is usually classed as a hybrid product, combining characteristics of both debt and equity products.

Private Ownership

  • The concept of an equity share may exist even in a company that is not publicly traded. In this situation, the holder of an equity share will own a stated proportion of the company. This use of the phrase often involves the part-ownership being given as a payment. For example, if a new company does not have the cash available to hire a consultant, it might pay her with a "10 percent equity share." It's important to be precise about definitions in such a context. For example, the company only may be offering to give the person 10 percent of future profits and not give them any formal ownership or any say in how the business is running. In this case, the person is not technically getting an equity share.

Mortgages

  • "Equity share" is also used in reference to a particular type of mortgage most commonly found in the United Kingdom. It is designed to boost sales of newly built houses to first-time buyers who might struggle with a traditional mortgage. The system usually involves the buyer taking out a mortgage from a bank for 70 percent of the house value and getting the remaining 30 percent of the value as a loan jointly funded by the government and the construction firm that built the house. The advantage is that the buyer will own the property outright, but be able to obtain a better mortgage rate because the loan-to-value ratio is lower.

References

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