3.2 Equity Securities

What Equity Ownership Means

When you buy a share of equity, you acquire a fractional ownership stake in the issuing company. As an owner, you are entitled to a share of profits (via dividends) and a residual claim on assets in liquidation — but only after all creditors and preference shareholders are paid. Equity is therefore the riskiest security in the capital structure, and also the one offering the highest potential return.

Types of Equity

Common Equity (Ordinary Shares)

• Carry voting rights (usually one vote per share).
• Receive dividends at the discretion of the board — not guaranteed.
• Rank last in liquidation (residual claim).
• The vast majority of listed equity in India is common equity.

Preference Shares

Preference shares combine features of equity and debt — they carry a fixed dividend rate and rank above common equity (but below creditors). Indian companies issue several variants:

• Cumulative: If a dividend is skipped in any year, it accumulates and must be paid before any common dividend.
• Non-cumulative: Missed dividends do not accumulate; they lapse.
• Convertible: Can be converted into common equity after a specified period or on a trigger.
• Non-convertible / Redeemable: Repaid after a fixed term, behaving more like debt.

Exam distinction: Cumulative preference = missed dividends accrue. Non-cumulative preference = missed dividends gone forever.

Dividends

A dividend is a distribution of profit to shareholders.

• Interim dividend: Declared and paid during the financial year, before annual results.
• Final dividend: Declared after the annual general meeting (AGM) alongside the year's results.
• Dividend yield: Annual dividend per share divided by the market price per share, expressed as a percentage.

In India, dividends are taxed in the hands of the shareholder per the applicable income-tax slab (post the abolition of Dividend Distribution Tax in 2020).

Key Equity Valuation Terms

Quick reading: A high P/E suggests the market expects strong earnings growth (or the stock is expensive). A low P/E may signal value — or trouble.

Worked P/E Example

Consider two companies in the same sector:

• Company X: market price ₹1,500, EPS ₹60 → P/E = 25x
• Company Y: market price ₹800, EPS ₹40 → P/E = 20x

Company X trades at a higher P/E, meaning investors pay ₹25 for every ₹1 of its earnings — typically because the market expects faster earnings growth. Company Y is cheaper per rupee of earnings but may carry slower-growth expectations or higher risk. P/E is most meaningful when compared within the same industry or against a company's own historical range, not in isolation.

Caution: P/E alone can mislead. A negative or near-zero P/E arises when earnings are loss-making or trivially small — always read it alongside earnings quality and growth.

Order Types

When trading equity on NSE or BSE, two order types dominate:

• Market order: Executes immediately at the best available prevailing price. Guarantees execution, not price — in a thin market, a large market order can fill across worsening prices.
• Limit order: Specifies a maximum buy price or minimum sell price. Executes only at that price or better; no guarantee of execution if the market never reaches the limit.

Supporting instructions include stop-loss (triggers a market order once a threshold is crossed) and day/IOC (validity of the order).

Corporate Actions Reshaping Holdings

Critical contrast: A rights issue is the only one of the three that brings in fresh capital. Bonus and split are accounting reshuffles — the shareholder's proportionate ownership and the company's net worth are unchanged.

India Context: Demat Delivery and STT

• Demat delivery: All exchange-traded equity in India settles in dematerialised form through NSDL/CDSL; physical share certificates are effectively obsolete for listed companies.
• Securities Transaction Tax (STT): A government tax levied on the purchase and sale of securities listed on recognised stock exchanges, collected by the exchange at trade execution. For equity delivery trades, STT is 0.1% on both the buyer and the seller (current rate). Payment of STT is also a prerequisite for concessional long-term capital gains rates on listed equity.
• STT applies regardless of whether the trade is profitable, and is distinct from brokerage, exchange charges, SEBI turnover fees, stamp duty, and GST.