Equity share

Also called: Ordinary share, Share, stock · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"; Class 8, Ch 7 "Factors of Production"

Meaning

An equity share (also called an ordinary share, share or stock) is a unit of ownership in a company. It gives the holder voting rights and a residual claim, meaning the right to what is left of profits and assets after workers, lenders and taxes have been paid.

It matters because equity lets companies raise long-term money from savers without taking a bank loan. It also lets households own a small part of India's companies and share in their growth.

Formula: Ownership share (%) = (Shares you hold ÷ Total shares issued by the company) × 100

Explanation

How it works: what an equity shareholder gets

• Ownership. Think of a company as one big chapati (Class 7 analogy). Each share is one piece of it.
• Voting rights. Shareholders vote on key company decisions, such as choosing the board of directors. More shares means more votes.
• Residual claim. The shareholder is paid last.
• First the company pays workers, lenders (interest) and taxes.
• Whatever is left belongs to the equity shareholders.
• In good years: a lot is left over, so shareholders earn the most.

• In bad years: little or nothing is left, so shareholders lose first.

• Restaurant analogy (Class 7). You take money from friends to grow your restaurant. In return they get a share of the profits and become part-owners. They are shareholders, not lenders.

• Risk-sharing. One company's risk is spread across lakhs of shareholders, so no single person carries all of it.

How investors earn from shares

• Dividend (the part of profit a company pays out to its shareholders). It is not fixed. The company may pay a lot, a little or nothing.
• Price rise (capital gain). You buy a share and later sell it at a higher price on the stock exchange.
• Worked example (from the notes):
• A company has 1 crore shares. You own 10,000 shares.
• Your ownership = 10,000 ÷ 1,00,00,000 = 0.1% of the company.

• You get 0.1% of any dividend the company pays.

• Worked example: residual claim (made-up numbers):

• Revenue ₹100 crore. Wages, interest and taxes add up to ₹80 crore. ₹20 crore is left for shareholders.
• Next year revenue falls to ₹85 crore, but costs stay at ₹80 crore. Only ₹5 crore is left. Lenders still get their full interest. The shareholders' part falls by three-fourths.

Where shares are issued and traded

• Primary market (where new shares are sold for the first time). One example is an IPO (Initial Public Offering), when a company sells shares to the public for the first time. The money goes to the company.
• Secondary market (where investors trade existing shares among themselves on a stock exchange). The company gets no new money.

• Even so, the secondary market matters. Buyers are more willing to buy in an IPO because they know they can sell later.

• Equity is part of the capital market (the market for long-term funds, over 1 year). A share has no maturity date, so the company never has to repay the money.

What makes a share price rise or fall

• Price discovery. Buyers and sellers together set the price. The price shows what the market thinks the company is worth today.
• Company profits. If people expect higher profits, they expect bigger dividends, so they will pay more for the share. Expected losses push the price down.
• Interest rates. When interest rates rise, safe bonds and deposits pay more, so shares look less attractive. Demand for shares falls, and so do their prices.
• Liquidity. A share that is easy to sell quickly is more attractive to investors.

In India

• Stock exchanges:
• BSE was set up in 1875 as the Native Share and Stock Brokers' Association. It is Asia's oldest stock exchange. Its index, the Sensex, tracks 30 large companies. Its base year is 1978-79 = 100, so a reading of 80,000 means these shares are worth about 800 times their base-year level.

• NSE was set up in 1992 and began screen-based equity trading in 1994. Its main index is the Nifty 50.

• From paper to screen.

• Deals were once done on paper tickets, with paper share certificates and open-outcry trading (brokers shouting bids on the trading floor).

• Shares are now held in demat accounts (dematerialised accounts, where shares are stored electronically, the way money is stored in a bank account).

• Regulator: SEBI.

• SEBI was set up in 1988 as a non-statutory body, meaning it had no legal power to punish.
• The Harshad Mehta scam (1992) showed how weak market supervision was.
• SEBI got statutory powers in January 1992 under the SEBI Act, 1992 [2].

• Its mandate has three parts: to protect investors, to develop the securities market and to regulate it [2].

• Company law. Share capital and the issue of shares come under the Companies Act 2013, run by the Ministry of Corporate Affairs (MCA).

• Financialisation of household savings. This means households moving their savings out of gold, property and plain deposits and into financial assets. Figures from the Economic Survey 2025-26:
• The share of equity and mutual funds in yearly household financial savings rose from 2% (FY12) to over 15.2% (FY25) [3].
• Individual investors owned 18.8% of equity (September 2025). Household equity wealth rose by about ₹53 lakh crore between April 2020 and September 2025 [3].
• 235 lakh demat accounts were added in FY26 (till December 2025), taking the total beyond 21.6 crore [3].
• Unique investors crossed 12 crore in September 2025, and nearly one-fourth are women [3].

Don't confuse with

• Preference share. It is paid its dividend first and gets its capital back first if the company closes. It usually has no voting rights. An equity share has voting rights but is paid last (residual claim).
• Bond / debenture. A bondholder is a lender who gets a fixed coupon (yearly interest) and the principal back on a set date. An equity shareholder is an owner with no fixed return and no repayment date.
• Primary vs secondary market. The company gets money only when shares are first issued (primary market, e.g. an IPO). Trading on BSE or NSE is secondary-market activity, and none of that money reaches the company.
• Money-market instruments. Treasury bills, commercial paper and certificates of deposit are short-term debt of up to 1 year. Equity is a capital-market instrument with no maturity date.

Prelims Hooks

• Equity share = ownership + voting rights + residual claim. Preference share = priority in dividend and capital, but usually no voting rights. It is a hybrid (it has a fixed payment like debt but is legally part of share capital like equity).
• A company raises money only in the primary market (IPO). Buying Sensex or Nifty shares through a broker is a secondary-market trade.
• BSE (1875) is Asia's oldest stock exchange and began as the Native Share and Stock Brokers' Association. Sensex = 30 companies, base year 1978-79 = 100. NSE (1992) started screen-based trading in 1994, and its index is the Nifty 50.
• SEBI regulates the equity market. It was non-statutory from 1988 and became statutory under the SEBI Act 1992 [2]. Trap: G-secs, forex and currency derivatives are regulated by the RBI, not SEBI.
• Ownership share = shares held ÷ total shares. For example, 10,000 out of 1 crore shares = 0.1% of the company and 0.1% of any dividend.
• Individual investors held 18.8% of equity ownership in September 2025, and demat accounts exceeded 21.6 crore (FY26, till December 2025) [3].

Mains Points

• Equity is a cheaper and safer way to fund growth.
• Money raised through shares has no fixed interest and no repayment date, so a company can survive bad years without defaulting.
• This lowers dependence on bank loans and foreign money, and savings flow straight to firms that invest and create jobs (direct finance).

• The rise of equity and mutual funds in household financial savings, from 2% (FY12) to over 15.2% (FY25), shows this shift is happening [3].

• More retail investors bring more risk.

• New investors, many from small towns and first-time savers, now own shares. They carry the residual risk, so they lose first when markets fall.

• Many may not understand this risk, especially in derivatives. Investor education and SEBI's investor-protection mandate [2] must grow as fast as participation does.

• Post-1991 capital-market reforms. SEBI's statutory powers (1992), NSE screen trading (1994), demat holding and clearing corporations cut fraud and settlement risk. They moved share trading from paper tickets and open outcry to transparent electronic markets. This is a useful point for GS-III answers on reforms and investment.

Related concepts

• Capital market
• Stock market
• Preference share
• International Financial Services Centre

Read more

• Financial markets: functions, structure and the regulatory map