Equity: owning a piece of a business
Where does a share’s return actually come from, and what can go to zero?
10 of 10 chapters published
Chapters
Beginner
- What a share isA share is a fraction of a business, not a ticket whose price moves. What that fraction actually entitles you to — and what it does not — decides everything else in this subject.
- Where the return comes fromAn equity return has exactly three sources: the business earning more, the market paying more for those earnings, and dividends. Two of them are the company's doing. The third is opinion, and it is the one people chase.
- DividendsA dividend is profit handed back rather than reinvested. Whether that is good news depends entirely on what the company would have done with the money — and a high yield is as often a warning as a reward.
- Splits, bonuses and buybacksTwo of these change nothing about what you own and are routinely reported as good news. The third genuinely changes your stake. Telling them apart is a useful test of whether you are reading a business or a headline.
Intermediate
- Rights issues and dilutionWhen a company issues new shares, everyone who does not buy some owns less of it afterwards. That is dilution, and unlike a split or a bonus it genuinely costs you something if you ignore it.
- Reading a shareholding patternWho owns a company tells you things the financial statements do not: whether the people running it have money at stake, whether professionals have looked and stayed, and whether the promoter has quietly borrowed against their stake.
- Large, mid and small capIn India these are not adjectives — they are a rank. The top 100 companies by full market capitalisation are large cap, the next 150 are mid cap, everything below is small cap, and the list is republished twice a year.
- Sectors and cyclesTwo companies of the same size, in the same market, can behave completely differently — because what a business sells determines what happens to it when rates rise, commodities move, or people stop spending.
Advanced
- Risk in equityA share can fall 40% and recover, or fall 40% and keep going to zero. The two look identical on the day. Telling them apart — and sizing so the second one cannot end you — is what equity risk management actually consists of.
- Holding periodA year in equity is close to a coin flip. A decade has historically been much less so. The arithmetic of that is simple, and the reason people do not act on it has nothing to do with arithmetic.