Equity Market – The Best Guide 2023

This is a complete guide to Equity Market. Here you will get to understand it in detail in an easy way, so let’s start.

We all have heard about different ways to make money. Making money from stocks is one of the best ways for them.

In fact, this method was and is owned by the richest people worldwide. Warren Buffett, Elon Musk, Jeff Bezos – every billionaire you name has gotten rich by stocks.

People start a company, and when they need to scale the business, they go to investors to sell their company’s equity; investors invest their money in the company in return for an agreed percentage of the company’s equity.

But what exactly does that equity mean? In this post, we’ll try to figure out the answer to the question. We shall know the basics and detailed information about equity and other necessary and useful information related to that.

In the simplest word, equity means the direct ownership of a company. But, in this article, we shall discuss the equity market more rather than only focusing on the meaning of the word – ‘equity’.

Though the name’ equity market’ may be somewhat uncommon to hear, I am certain that we all have heard the phrase ‘stock market’ and ‘stock market’ & ‘equity market’ shares the exact same meaning.

A share market is a place where the ‘share’ or, better to say, the ‘equity’ of a company is traded. This equity trading occurs in Exchanges (like the New York Stock Exchange or the National Stock Exchange of India).

In the early days, trading used to do physically on the floor of exchanges. But, currently, most of the trading, in fact, almost all trading, is done digitally.

Equity can be classified into two types according to the basis of the ownership –

• Private Equity
• Public Equity

Private equity shares are traded via an exchange where any person having an eligible account is allowed to buy the equity of a company or sell the equity of a company.

But, private equity shares aren’t traded via an exchange; they are traded with the help of private firms (like escrow platforms). Dealers also takes a vital part in these kinds of transactions.

But, in normal day-to-day life, we don’t usually deal with private equity shares; rather, we deal with public equity shares. That’s why we shall only discuss public equity shares by dividing the topic of discussion further.

The first topic that will be discussed is – how the public buys public equity shares –

As we have discussed, most companies require investors’ funds to grow. There may be hundreds of reasons the company wants investors to invest in it. However, when a company needs funds, it goes to investors.

Usually, at first, companies go to private investors who buy a significant portion of the company at a lower valuation.

But, when the company needs even more capital, it usually goes public. This means that now even a normal person can invest in the company. The process of becoming a public company from a private company is called an IPO (Initial Public Offering). There are many rules and regulations that a company has to abide by to be eligible for going for an Initial Public Offering.

Now we understand the major difference between public companies and private companies. Now let’s know what happens during and after an IPO.

During an Initial Public Offering, people bid to buy the shares of a company. On a listing day (when the stock lists in the share market), the company’s shares are allotted to some random people (it only needs to be random sometimes – well, there are other factors too to consider).

After the shares are allotted, they can sell and buy the company’s shares to people.

The process of buying a share is done by bidding, and the process of selling a share is done by asking. When a seller wants to buy a share at the price the buyer has asked for, only then the transaction occurs.

The process of buying and selling a share is also quite easy to understand –

When a person wants to buy the equity share of a company, he has to go to his broker (nowadays, broking app) to request the buy order. When the broker (broking apps) receives the order from the buyer, it just checks certain conditions like –

• Whether the person has sufficient funds to buy the share.

After the buyer complies with all the criteria, the request to buy the shares is placed on the exchange.

Now, here comes the involvement of a seller.

A seller who already has the company’s shares can sell his shares in the market.

When a seller wants to sell the shares he owns, they must follow almost the same process.

First, the sell order must be placed with the broker. Like buying, the broker does some necessary check-in to ensure that the selling orders can be processed further.

The brokers check some factors like-

• Whether the person really owns the shares of the company.
• Whether the person owns a sufficient number of shares, they want to sell.
• Whether shares are eligible to be sold off etc.

Your order will be placed on the exchange upon completing the criteria. When the price the seller had asked for and the price at which the buyer wants to buy the share match, then the exchange of the shares takes place & the shares are virtually handed over to the buyer & the amount of fund equivalent to the then Current Market Price (CMP) is virtually transferred to the trading account of the seller.

Remember that every trading is done at CMP / CMV (Current Market Value).

The current Market Value keeps changing. The more orders for buy/sell, the more rapidly the Current Market Price changes.

Right of the equity shareholder in the company:

When you buy equity shares, you become the owner of a part of the company – be it a very small percentage, you are still the owner. As an owner of the company, you become eligible to make decisions about the upcoming corporate actions of the company. These actions include dividends, an accusation of another company, a stock split, a stock merger etc.

Now let’s try to know why investors invest in the company or what benefit the investors get by investing in the company:

Well, an investor would not like to invest in any company just to be a part of the company to enjoy voting in the corporate actions. 

The reason why investors invest in companies is that they want to grow their money. This happens when a company performs well, generates good revenues, makes great profit etc.

As the company generates revenue and produces profits, more and more investors are interested in investing. As the demand for buying equity shares rises, so rises the price of the equity shares of the company. And that’s how a stock price increases.

But the opposite is also true. This means that when you are investing in equity shares, you may also lose your money in the stock market. It is clear that when a company does not perform well in the market, for example, when a company does not make revenue as per the estimated predictions or fails to make profits as per expectations, its stock price generally falls.

When the stock price falls, the fee in which the investors invested their money in the company, they face losses.

Anyway, the price of the stock of any company can fluctuate regardless of the company’s performance in the market. The simple fact is that when many investors want to buy a company’s shares, its share price rises. And in the same way, when many investors want to sell their equity shares in the market, the company’s share price goes down.

Exchange:

The final thing we will discuss in the article is exchange. An exchange is a place where trading takes place.

Though most of the trading occurs virtually, the supercomputers in the exchanges make every single trade. Still, in many parts of the world, some people enjoy doing physical trading/floor trading. Although the practice is not so popular now, it has been completely demolished.

Conclusion

So this is what equity is. In this long article, we have touched on every single important thing linked with equity. We have not only discussed the lexical definition of the term’ equity’ but also what equity is in great detail.

Topics like equity shares, exchange, and benefits of equity shareholders of a company were also explained in the article. We hope you have found the article useful in knowing what equity is. If you have any additional problems regarding equity, feel free to ask your question.

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Sunil Kumar

I am a well-skilled experience Stock Marketer and Investor. I have good knowledge of the stock market and investment. I have completed Bachelors in Finance And Investment from the University of Virginia (US).

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