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March 16, 2013

What is Equity? Decode the Jargon


If you are new to the Stock Market, you may probably ask what Equity means.  You may find the meaning for the word ‘Equity’ as ‘Being Fair’, ‘Equal’, etc in any Dictionary.  Equity is a share of a company you pay for a price either at the Initial Public Offer (IPO) or at the Secondary Market, where the price of the share is determined according to the demand and supply of the shares of that particular Company.   

Now, you may ask why need to buy a share of a company, let me explain, when one person decides to do business, he invests his own money or borrowed money from friends, relatives and banks.  He doesn't give any share of profit to any of whom he borrowed from as it is considered as debt.  He needs to pay it back when they ask for the money.  He enjoys all the profits and also suffers all the losses.

When his business needs to be expanded and he finds short of money, he can borrow from the same people but when they refuse to pay, he offers to share the profit.  An agreement gets signed and formed as Partnership Firm when people accept the offer.  Again when the business to grow more and expand its business to the great extent, it needs more funds.  Since more than 20 persons aren't allowed to form a Partnership Firm, and they have only limited money, the business have an option to go public and offer to share the profits and of course losses among the investors.

Eventually, the shares of the company are listed on the Stock Market with all rules and regulations and the shares are bought and sold by the people at any time through a medium, Brokers.  The price of the share is fundamentally determined by its performance and technically determined by its volume and other factors.  If you buy a share of a company for Rs.20/- and it goes up to Rs.30/-, you get a profit of Rs.10/- if you sell it.  Apart from buying shares, one can indirectly buy them through  Mutual Funds.

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