Owning a slice
Every other security in this chapter is a claim on a company. Equity is the company. Hold one share out of ten crore and you own one ten-croreth of the business: its factories, its brand, its cash, its debts, and whatever is left after everyone else has been paid. The syllabus describes equity as fractional ownership: shareholders collectively own the company, and they carry the risks and the rewards that ownership brings.
That last sentence is the entire risk-return character of the product. Nobody promised an equity holder anything. If the business earns, the shareholders earn. If it fails, they are paid last, after lenders, employees, the tax office and preference shareholders, and often receive nothing.
The syllabus describes each product on four lines. For equity shares: issued by companies or legal entities; investors are institutional (foreign portfolio investors, foreign institutional investors, domestic institutional investors) and individual (retail and high net-worth individuals); the medium is direct issuance by companies through stock exchanges; the regulators are SEBI together with the regulators under the Companies Act, the Ministry of Corporate Affairs and the National Company Law Tribunal.
What ownership gives you
Four things come with an equity share.
A pharmaceutical company lists on the NSE and BSE by selling new shares to the public. The issuer is the company; the buyers include mutual funds and foreign portfolio investors (institutional) and thousands of individuals (retail, plus a few HNIs); the medium is the exchange platform through which the issue is made and later traded; SEBI's regulations govern the offer, and company law (administered by the MCA, with disputes before the NCLT) governs the company itself.
Where equity sits among the products
The chapter's later topics introduce instruments that borrow pieces of equity's character without being equity. Preference shares take priority on dividends but usually give up the vote. Convertible debentures start life as debt and turn into shares later. Depository receipts represent shares held abroad. Warrants are a right to buy shares. Keeping plain equity clearly in mind, ownership with full risk and full reward, makes every one of those hybrids easier to place.
A company must pay interest on its debt or default. It does not have to pay a dividend, ever. An option describing equity dividend as a fixed or guaranteed payment is describing debt, or at best a preference share, not an equity share.
FPI is foreign portfolio investor, FII is foreign institutional investor (the older label for the same kind of participant), DII is domestic institutional investor, and HNI is high net-worth individual. The exam uses all four without expansion.
- Equity shares are fractional ownership. Shareholders collectively own the company, bear its risks and enjoy its rewards.
- Issued by companies and other legal entities; bought by institutions (FPIs, FIIs, DIIs) and individuals (retail and HNIs); issued directly through stock exchanges.
- Regulated by SEBI and the Companies Act machinery: the Ministry of Corporate Affairs and the National Company Law Tribunal.
- Equity is the residual claim: paid last, but with no cap on the upside and, for a shareholder, no liability beyond the money invested.