Understanding an Equity

Equity consists of funds that shareholders invest in a company plus a certain amount of profit earned by them that is retained by the company for further growth and expansion.

Equity is a primary asset class when it comes to investing and diversifying one’s portfolio. Additionally, derivatives allow equity to diversify beyond just shares into securities such as bonds, commodities and currencies.

Equities and their derivatives are traded on stock exchanges like BSE, NSE, NYSE etc.

Types of Equities

Several of the most prevalent forms of equity include the following:

Common stock

Corporations, both public and private, can issue ordinary shares, and common shareholders are the owners of a firm who give the first equity money required to launch the business.

Common stock ownership in a public firm has several advantages for investors. Several of its primary advantages include the following:

  • Appreciation of capital
  • Dividends
  • Voting rights
  • Marketability (i.e. ease with which shares can be purchased or sold)

There are a few disadvantages to owning common stock. While common shareholders control a portion of the corporation, they are in a relatively weak position, as senior creditors, bondholders, and preferred shareholders all have first rights on its revenues and assets. While bondholders are guaranteed interest payments, dividends are paid to shareholders at the discretion of the company’s directors.

Preferential stock

Preferred stock is a category of capital stock that entitles stockholders typically to fixed dividends before common stock and to a stated dollar value per share in the case of liquidation. If a business’s ability to pay interest and dividends deteriorates due to weak earnings, preferred shareholders are better protected than common shareholders but worse off than creditors.

Preferred shares are available in various configurations, including convertible, retractable, and variable-rate preferred shares. One disadvantage of preferred shares is that the majority of them are non-voting. However, when a specified number of preferred dividends is withheld, preferred shareholders typically receive voting rights.

Additional paid-in capital

Additional paid-in capital (APIC) is an accounting term that refers to money an investor pays more than a stock’s par value.

APIC, which is frequently referred to as “contributed capital over par,” occurs when an investor purchases newly issued shares directly from a corporation during the company’s initial public offering (IPO). APIC, which is categorised on a balance sheet under shareholder equity (SE), is considered a profit potential for businesses because it results in excess cash from stockholders.

Treasury stock

Treasury stock, also known as treasury shares or reacquired stock, is previously issued stock that the issuing corporation buys back from stockholders. As a result, the overall number of available market shares decreases. These shares have been issued but are no longer outstanding and are not considered in dividend distribution or earnings per share calculations (EPS).

Other comprehensive income/loss accumulated

Subtracting net income received from overall gains and losses on the income statement basically gives us those incomes or expenses that are yet to be realised/recognised but have been accounted for in the income statement. This value is called Other Comprehensive Income (OCI). Since they are a part of the overall financial health of the company, investors should take them into consideration for assessing their potential investments.

Retained Earnings

Earnings retained are a critical subject in accounting. The word refers to the previous profits of a company, less any dividends paid in the past. The term “retained” refers to the corporation retained earnings rather than distributed to shareholders as dividends. As a result, retained earnings decline when a business incurs a loss or pays dividends but grow when new profits are generated.