Basics forms of equity

Equity in its simplest form is ownership in a company. This could have three basic forms:


•Common Shares/Stocks
•Preferred Stocks
•Stock Warrants

If you own equity in a company, you own a share in the income of that company. An equity
owner receives his share of income from the company’s income, in the form of dividends, only
after all the debt obligations and preferred stock dividend have been cleared. The price of the
equity which is commonly called share price reflects the earning potential, projected growth
rate, financial risk and operating risk of the firm and general economic conditions in which the
firm operates.

A firm issues its share in the primary market to raise funds for capital expenditure. These shares
then can be traded in the secondary market, commonly called stock market or share market.

The price of equity in the stock market is determined by the forces of demand and supply. The
price of equity is projected and analyzed with the help of various technical and fundamental
analyses. If the projected price is less than the market price we can say that the stock is
overvalued and vice versa.

A share can only be traded in stock market only if it is listed on a stock exchange. A stock
exchange is an entity which facilitates brokers and traders to trade stocks. A broker is a regulated
and registered member of the stock exchange which buys and sells securities on behalf of the
traders and investors. Equity is a subset of securities. Securities are tradable instruments having
some financial value. It can include both debt and derivative instruments. Every trade must be
routed through a broker.

To start trading an investor or a trader must have a dematerialized account, commonly called
demat account and a trading account. A demat account is a depository account to store the shares
in the electronic form instead of the bulky certificates. A trading account is an account where the
investor deposits some money in the form of cash or shares against which the investor wishes to
buy the shares. An investor can either buy the shares by paying the full amount, cash segment, or
by taking some leverage from the broker, margin segment.

Trading can be done by calling the broker, offline mode, or through internet with the help of a
trading terminal provided by the broker, online mode.