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Exit Guide

What is Equity?

What comes to your mind when you think about becoming the owner of a company?

The profit of the company is your profit.

If the company makes a loss, it is also your loss.

When you buy shares of a company, you buy the equity of that company. It means that you have become one of the owners of the company.

The percentage of your ownership is very small. Therefore, when the company makes a profit, it gives you the profit amount as a dividend (we will talk about dividends later in detail). 

Buying shares means buying equity, which means you become a ‘part owner’ of the company.

What does part ownership mean?

What does part ownership mean?

Part ownership means ownership of a small percentage of the company’s assets, debts, and liabilities that are limited to the amount of money you have invested.

This means that your liability can be as much as your money invested in the company’s shares.

Or, if the company becomes bankrupt, the amount of money you can lose is equal to what you had invested.

By buying more shares, you can increase your percentage of ownership of the company.

How do people lose their money in equities?

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People lose their money when the share value of the company they have invested in declines

The share value can be higher or lower than the value at which they purchased in the short run.

In the long run, the value can rise above the value at which they had purchased if it is a good business.

Sometimes, due to business uncertainties, the share value can even become half or zero of the value you had invested in.

For example, suppose you had invested in the stocks of a paint company.

Assume that the value of the stock was ₹100 per stock.

In cases like the entry of a big competitor.                                                                                         

or if there are some big changes in the price of paints.

The stock price might decrease.

At other times, like during the Diwali festival, when most people in India paint their homes, the value of the stock can increase.

Therefore, it is better to select businesses that have lower chances of getting affected negatively.

You might always want to have ownership of a good business.

Click to proceed to the next chapter on Equities

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