What Are Equities?

Equity represents ownership in a company, represented by shares of stock. Shareholders have voting rights, may receive dividends, and share in the company's assets. Equity is a key component of a company's capital structure and provides investors with ownership stakes in publicly traded firms.

In equity trading, investment banks employ equity derivatives for the transactions they carry out every day. However, individual investors use them seldom as they are tough to crack. Equity derivatives are a precise type of financial derivative that derives their worth from stock indexes and stocks.

Types of Equity Shares

Common Equity Shares: Common equity refers to ordinary shares held by shareholders, providing voting rights and a share in company profits.

Preferred Equity Shares: Preferred equity grants shareholders preferential treatment, with higher claim on assets and priority in receiving dividends.

Employee Equity Shares: Employee equity, often in the form of stock options, is granted to employees as part of their compensation, allowing them to purchase company shares at predetermined prices.

What is Equity Market?

In India, the equity market refers to the market where shares of publicly listed companies are bought and sold. The primary platforms for equity trading in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). 

Types of Equity Markets

Here are some different types of equity market in India:

National Stock Exchange (NSE):

The NSE is one of the leading stock exchanges in India. It provides a modern, electronic trading platform where a wide range of financial instruments, including equity shares, derivatives, and exchange-traded funds (ETFs), are traded.

Bombay Stock Exchange (BSE):

The BSE is one of the oldest stock exchanges in Asia. It plays a crucial role in the Indian capital market and provides a platform for trading a variety of financial instruments, with a focus on equity shares.

Derivatives Market:

Both the NSE and BSE have vibrant derivatives segments where equity derivatives, such as futures and options, are traded. Derivatives allow investors to speculate on the future price movements of underlying securities.

Initial Public Offerings (IPOs) Market/ Primary Market:

Companies in India often raise capital by going public through IPOs. During an IPO, shares are offered to the public for the first time, and investors can subscribe to these offerings to become shareholders in the company.

Small and Medium Enterprises (SME) Exchange:

Both the NSE and BSE have platforms dedicated to Small and Medium-sized Enterprises (SMEs). These exchanges provide a venue for SMEs to list their shares and raise capital.

Futures and Options (F&O) Segment:

The derivatives segment on the NSE and BSE includes futures and options contracts based on various underlying assets, including individual stocks.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs):

REITs and InvITs have gained traction in India, providing investors with opportunities to invest in real estate and infrastructure projects, respectively.

Understanding these different facets of the equity markets in India is crucial for investors looking to participate in the dynamic and evolving Indian financial landscape. Each type of instrument and market segment has its own characteristics, risk factors, and potential rewards. Investors should carefully consider their investment goals and risk tolerance before participating in the equity markets.

What are Equity Products?

Equity product are financial instruments representing ownership in a company, offering investors a share of its assets and profits. Common examples include equity shares, derivatives, exchange-traded funds (ETFs), and rights issues, providing various avenues for investors to participate in the equity market. These products allow individuals to buy, sell, and trade ownership interests in publicly-listed companies.

Types of Equity Products

In India, the equity market is a vibrant space with various types of equities products available for investors to participate in. Here are some of the key equity products in India:

Equity Shares:

Equity shares represent ownership in a company. They come with voting rights, allowing shareholders to participate in decision-making processes at annual general meetings. Dividends are distributed to equity shareholders based on the company's profits.

Preference Shares:

Preference shares confer preferential rights to shareholders, particularly in terms of dividend payments and the repayment of capital in case of liquidation. However, preference shareholders usually do not have significant voting rights.

Exchange-Traded Funds (ETFs):

ETFs in India are funds that are traded on the stock exchange and typically track a specific index or sector. Investors can buy and sell ETF units on the stock exchange like individual stocks.

Mutual Funds:

Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. There are various types of mutual funds in India, including equity funds, debt funds, and hybrid funds.

Initial Public Offerings (IPOs):

Companies in India raise capital by going public through IPOs. Investors can subscribe to these offerings and become shareholders in the company when it gets listed on the stock exchange.

Rights Issues:

Rights issues allow existing shareholders to buy additional shares of the company at a discounted price. This gives them the opportunity to maintain or increase their ownership in the company.

Bonus Shares:

Companies may issue bonus shares to existing shareholders as a form of reward. Bonus shares are given at no additional cost and are typically issued in proportion to the number of shares already held.

Small-Cap, Mid-Cap, and Large-Cap Stocks:

Stocks are often categorized based on market capitalization. Small-cap stocks have a smaller market capitalization, mid-caps are in the middle, and large-cap stocks have a larger market capitalization. These categories offer different risk and return profiles.

Sectoral Stocks:

Investors can choose to invest in stocks from specific sectors. For example, the information technology sector, pharmaceuticals, banking, etc. This allows investors to align their portfolios with specific industries.

Depository Receipts:

Indian companies may issue Global Depository Receipts (GDRs) or American Depository Receipts (ADRs) to allow their shares to be traded on international exchanges. This facilitates investment by foreign investors.

Futures and Options (Derivatives):

Derivatives, such as futures and options, are financial instruments whose value is derived from an underlying asset, which can include individual stocks. These are traded on the derivatives segment of stock exchanges.

Options:

When an investor gets to execute share trading in the stock market at an exact price, also known as the strike price, that contract is recognized as an option.

Under options, the investor is not obliged to make a purchase or a sale.

Futures:

When a contract is made between two entities in which one investor (the buyer) buys basic security at a precise price and date in the future, it is called futures. An obligation rather than a right is shaped in futures similar to options. When the futures contract accomplishes the specific date, the buyer needs to buy the stock.

The buyer and the seller have to buy and sell the stock and cannot let the contract expire. Exchange is the place that does the trading for futures.

Forwards Similar to futures, forwards create an obligation between two entities to exchange stock on a particular day at a specific price.

In a forward contract, money and stocks are traded only on the settlement day.

Futures contracts normally generate cash flows as they are settled daily. Trading of forwards is done over the counter (OTC).

Warrants:

Warrants are similar to options in which the investor has approved the right but is not obliged to buy a stock or an underlying asset at a particular date in the future. Investors do not issue warrants as in options as an alternative; companies issue warrants to those who hold company bonds and preferred stocks.

Convertible Bonds:

When the bondholder can alter the bond into shares of the same company, it is considered a convertible bond. There is a maturity date and a coupon for this bond, like regular bonds. Moreover, the exchange price and conversion rate are also aspects of this. In the equity market, bond provisions feature these bonds, and they can be used in a changeable arbitrage strategy to make it secure than ordinary shares.

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs):

REITs and InvITs are investment instruments that allow investors to participate in the real estate and infrastructure sectors, respectively. They provide an avenue for investors to invest in these asset classes without directly owning physical properties or infrastructure projects.

Sovereign Gold Bonds (SGBs):

While not traditional equity products, SGBs issued by the Government of India allow investors to invest in gold in a paper form. These bonds are denominated in grams of gold and offer an interest rate in addition to potential capital appreciation.

Investors in the Indian equity market should carefully consider their investment objectives, risk tolerance, and investment horizon when selecting equity products. Additionally, staying informed about market conditions, regulatory changes, and company-specific factors is crucial for making informed investment decisions.

What is Equities Trading?

Equities trading involves the buying and selling of ownership shares in publicly listed companies on stock exchanges. Traders aim to profit from price fluctuations, and the process includes various strategies such as day trading, swing trading, and long-term investing. Equities trading plays a vital role in capital markets, providing liquidity and facilitating investment.

Types Of Equity Trading

Equity trading includes various types such as day trading, where securities are bought and sold within the same trading day; swing trading, involving holding positions for a few days or weeks; and long-term investing, where investors hold securities for an extended period, often years, aiming for capital appreciation and dividends. The choice of trading type depends on an individual's risk tolerance, time commitment, and investment goals.

Frequently Asked Questions

Which Are the Three Types of Equities Mentioned in The Equity Theory?

In the stock market, equity typically refers to ownership in a company represented by shares of stock. The three types of equity include:

Common Equity Shares: Grant shareholders voting rights and a share in company profits.

Preferred Equity Shares: Offer preferential treatment with higher claim on assets and priority in receiving dividends.

Convertible Equity Shares: Provide the option to convert shares into a predetermined number of common shares, offering flexibility for investors.

What Is the Difference Between Equities and Derivatives?

Equities: Represent ownership shares in a company, providing shareholders with voting rights, dividends, and a stake in the company's assets.

Derivatives: Financial contracts whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies. Examples include futures and options, enabling speculation and risk management.

Key Difference: Equities represent ownership, while derivatives are financial instruments with values derived from underlying assets, serving purposes like hedging, speculation, and leveraging.

How Do Preferred Equity Shares Differ from Common Shares?

Preferred equity shares provide shareholders with preferential treatment, including higher claims on assets and priority in receiving dividends. Unlike common shareholders, preferred shareholders typically do not have voting rights.

How Can Investors Participate in Equity Markets? 

Investors can participate in equity markets by buying and holding stocks, engaging in day trading or swing trading, investing in ETFs, participating in IPOs, and exploring various equity products like preferred shares or REITs. The choice depends on the investor's goals and risk tolerance. 

What Is the Role of Equity in A Company's Capital Structure?

Equity is a component of a company's capital structure and represents ownership interests. It contrasts with debt and plays a vital role in funding operations and investments. Equity holders bear the residual risk and reward of the company.