Define Equity Share

Equity shares can be easily obtained through the New York Stock Exchange.

An equity share is an incremental portion of ownership in a company. Commonly referred to as shares of stock, the more equity shares of a given company an investor holds, the greater the percentage of the overall company he owns. The term equity shares refers to a company's ordinary shares of stock, which differ from preferred shares of stock by the inclusion of voting rights on major executive decisions.

Equity

In the context of any given company, equity refers to the specific ownership of a company's assets and the accompanying entitlement to any profits derived successfully from revenue. A private company, such as a law firm, may have a single owner, meaning that all equity is concentrated in a single individual. By contrast, a company that sells shares of its equity on a stock exchange, such as a manufacturer, spreads the ownership of its assets and profits among many individuals.

Ordinary Shares

Ordinary shares, also called common stock, are shares of stock that entitle the holders to periodic dividends disbursed at the company's discretion, as well as voting power concerning major decisions by the company's senior management, e.g., the acquisition of another company. In the event of bankruptcy, however, holders of ordinary shares take a lower priority on the asset liquidation spectrum to the company's lenders and preferred shareholders. Holders of ordinary shares are compensated after both these groups have been fully-compensated.

Preferred Shares

Preferred shares, also called premium shares, are shares of a company's stock that entitle holders to a guaranteed periodic dividend. Though preferred shares do not entitle holders to the voting rights of ordinary shareholders and quantitatively represent the same amount of ownership for a higher price, preferred shares are prioritized over ordinary shares in an asset liquidation, in the event of bankruptcy.

Example

To illustrate equity shares, suppose that the assets of a company, Company XYZ, are broken up into 10 shares of ownership. Each of these would be an equity share representing one-tenth of the total value of the company and one-tenth share in any profits derived from revenue. These equity shares may be divided among 10 or fewer holders. In other words, there might be 10 individual owners, each holding one equity share, or five holders, each holding two shares.

Obtaining Equity Shares

Investors generally buy and sell the equity shares of large companies whose stock is traded publicly on a stock exchange. By way of an agent, such as a stock broker, investors purchase stocks at a price determined by supply and demand in the market. Investors with unusually high amounts of cash, such as venture capitalists, purchase equity shares in private startup companies in the hope that the value of their equity share will quickly rise, allowing them to subsequently sell their equity share at a profit.

References

• BusinessDictionary: "Common Stock Definition"
• The Free Financial Dictionary: "Preferred Shares"