What are Shares?

What are shares in stock market?

Shares represent ownership in a company. When people or institutions buy shares they become part owners or shareholders. The total number of shares a company issues is called its capital stock or equity. Shareholders have certain rights like voting on important decisions such as electing the board of directors. They may also receive dividends which are payments from the company’s profits and can benefit from the potential increase in the value of their shares as the company grows. In simple terms, owning shares means owning a piece of the company and sharing its success.

Why invest in shares?

Now you have learned what is equity share and equity share meaning, Lets understand why invest in shares.

1. The possibility of earning greater profits

Stocks offer a higher potential return than alternatives such as Treasury bonds, bank deposit certificates, and gold, so investors choose to invest in stocks. 

2. The power to safeguard your money against inflation

The stock market's gains frequently outstrip the inflation rate. Historically, stocks have been a good way to combat inflation.

3. The potential to generate consistent passive income

Many companies provide their shareholders with dividends or a portion of their profits. Although some corporations pay monthly dividends, the bulk pays quarterly dividends.

4. Ownership pride

A share of stock indicates a company's fractional ownership. You can purchase a small stake in the company whose products or services you value.

5. Availability of liquidity

Most equities are traded openly on a major stock market, making them simple to buy and sell. It also makes equities a more liquid investment than other possibilities such as real estate assets which are difficult to sell.

6. Diversification

Investing in different types of shares allows you to establish a diverse portfolio spanning numerous sectors effortlessly. This diversification is crucial and divides your whole investment portfolio including real estate, bonds and even cryptocurrencies lowering your overall risk profile while enhancing profits.

7. The flexibility to begin slowly

Shares allow you to invest in stocks with as little as ₹100. You can start with a small amount since there are no high costs involved.
 

How to buy or sell shares?

Till now we have covered shares meaning now lets understand How to buy or sell shares.

Buying

1. Start by picking a brokerage platform. Consider factors like trading fees, ease of use and available research tools. Some brokers offer better customer support and educational resources which can help in making informed decisions.

2. Before buying shares it's important to research the company. Look into its financials, performance and industry trends. Understanding a company’s growth potential and risks will help you make a smart choice.

3. Once you’re ready place an order to buy shares. There are different order types:

a. Market order: Buys shares at the current price.
b. Limit order: Buys shares only if they reach your set price.
c. Stop order: Executes the buy when the stock hits a certain price.

4. After placing the order you’ll need to transfer funds to your brokerage account. Most brokers accept payments through bank transfers and some even allow credit or debit card payments.

5. Keep an eye on your investments. Stay updated with company news and market changes to make necessary adjustments to your portfolio when needed.

Selling

1. You might choose to sell shares when you achieve your goals, want to take profits or notice changes in market conditions. Assess your investment strategy to make the right decision.

2. Once ready place a sell order. You can choose from market orders, limit orders or stop orders depending on how you want to sell the shares.

3. After your sell order is executed the money from the sale will be deposited into your brokerage account.

4. After selling review the overall performance. Reflect on why you sold and use that insight to improve your future investment strategies.

Different Types of Shares

Equity Shares

Equity shares or ordinary shares consist of huge volumes of shares that are issued by a specific company. Equity shares can be transferred and even traded regularly in the stock markets. Equity shareholders are eligible to voting rights on distinguishing company matters as well as have the right to get dividends. That being said, the dividends offered by a company’s profits aren’t exactly fixed. Equity shareholders are liable to the optimum risk and have to bear the consequences of market volatility and other elements that impact stock markets based on their overall amount of investment. These types of shares are further classified.

Share Capital

On the basis of share capital, equity financing is briefly the amount a specific company raises by issuing shares. Every company can boost its share capital through IPOs (Additional Public Offerings). These are further classified into -

• Authorised Share Capital - Each company and its departments require prescribing a large amount of capital which is raised primarily by issuing equity shares. This limit can be enhanced by paying extra fees and completing some legal processes.

• Issued Share Capital - This is nothing but a certain portion of the corporation’s capital that is offered to the investors by issuing equity shares.

• Subscribed Share Capital - This is the portion of the corporation’s capital that is subscribed by the investors:

• Paid-Up Capital - This is the amount paid by investors for bearing the company’s stocks.

Classification of Equities

Here is everything you need to know about equities classified on the basis of the definition

• Bonus Shares - This type of definition refers to the extra stocks issued to existing shareholders for free or in the form of a bonus.

• Rights Shares - Right shares suggest that a corporation can offer new shares to its present shareholders. This is done so at a certain price and time period.

• Sweat Equity Shares - As a company’s employee, you can receive a reward by offering sweat equity shares if you’ve made a prominent contribution.

• Voting and non-voting Shares - Every company can issue zero voting rights or differential and make an exception to investors even though a huge amount of shares contain voting rights.

Shares: Issue and Regulation

A company's board of directors is allowed to issue a certain number of shares called authorized shares. Out of these only a part might be sold to shareholders known as issued shares. For example, a company may be authorized to issue 10 million shares but might only sell 8 million to the public. Since the total number of shares affects shareholder ownership, shareholders can vote to increase or decrease the number of authorized shares if needed. If they agree to change the number they formally request it by filing a document called articles of amendment.

For publicly traded companies in India, shares are listed on stock exchanges through a process called an Initial Public Offering. An IPO is a lengthy and costly process where companies raise funds and go through strict regulations set by authorities like Securities and Exchange Board of India (SEBI). Once listed, these shares can be traded on the secondary market which is regulated by SEBI and exchanges like Bombay Stock Exchange and National Stock Exchange.
 

Equity and Preference Shares Classification

Equity shares and preference shares are two main types of shares in a company. Equity shares represent ownership in the company and give shareholders voting rights on important matters. Equity shareholders receive dividends based on the company’s profits but there's no guaranteed dividend.

Preference shares, on the other hand give shareholders priority in receiving dividends before equity shareholders usually at a fixed rate. However, preference shareholders generally don't have voting rights. In case the company is liquidated, preference shareholders are paid before equity shareholders but after debt holders. Both play key roles in a company’s capital structure.
 

What are the benefits for offering shares?

If a company wanted, it could technically issue just one large ownership stake instead of breaking it into smaller shares but there are clear advantages to dividing equity into individual shares. Here’s why doing so is beneficial especially in the Indian market context:

1. By issuing shares a company allows early investors and founders to sell part of their ownership for cash in the stock market. This is much easier than selling one large ownership stake, which would be difficult to trade because there wouldn’t be enough buyers or liquidity for such a big chunk.

2. Public companies can offer employees stock options or shares as part of their salary. This motivates employees to perform better since their wealth grows with the company’s success. This is only possible when a company’s ownership is divided into shares.

3. When a company issues shares it allows a wider range of people to own a part of the business. This brings different ideas and opinions from shareholders which can lead to better decision making. It also prevents one or a few people from controlling the entire company, promoting better corporate governance.
 

Features of shares

1. Ownership Stake: When you buy shares you own a small part of the company and its assets.

2. Dividends: If the company makes a profit shareholders receive a portion of that profit as dividends.

3. Voting Rights: As a shareholder you get to vote on important decisions about the company's future like electing board members.

4. Capital Gains: If the value of the shares increases over time you can sell them for a profit, known as capital gains.

5. Transferability: Shares can be easily bought and sold on the stock exchange making it simple to trade them.

6. Risk and Returns: While shares come with risks like the possibility of losing money, they also offer the potential for higher returns compared to safer investments.
 

Why are shares issued by a company?

The primary goal of companies that issue shares are to raise cash for operations and expansion. However, the investor who purchases these shares gains partial ownership of the business. In the case of equity shares, the investor has voting rights in the corporation. This approach of generating funds through stock shares is called "equity financing." 

Stock issuance by companies happens for various reasons, which are crucial to the company's long-term goals. The primary reasons include the following.

● Avoiding Debt: The major motivation for issuing stock is to avoid debt. Stocks assist businesses in raising cash without incurring any debt.

● Funding Expansion: Companies frequently sell stocks at crucial times. These sales may assist in gauging financial expansion.

● To increase borrowing ability: Issuing stocks can sidestep a company from borrowing money while enabling future borrowings. This is because corporations reduce their obligations by issuing shares, resulting in greater overall financial stability.

● Intangible Objectives: Stock issuance may also have particular indirect objectives. For example, listing a firm on the NSE is undoubtedly the right step and a significant accomplishment compared to its rivals.

● Get Listed: By issuing shares, a company can be listed on the stock market, making it look more trustworthy and appealing to investors.

● Increase Visibility: Issuing shares helps the company become more well known which can improve how the public views it.
 

Shares Authorized vs. Issued vs. Outstanding

How much is a share worth?

The value of a share often referred to as its price can vary widely based on several factors. Here’s a simplified explanation of how to determine how much a share is worth:

1. Market Price: The most common way to find out how much a share is worth is by looking at its current market price, which is the price at which it is currently being bought and sold on a stock exchange. This price fluctuates throughout the trading day based on supply and demand.

2. Company Performance: A company's financial health including its revenue, profits and growth potential influences its share price. Positive earnings reports or growth forecasts can lead to higher prices while losses or negative news can decrease prices.

3. Valuation Metrics: Investors often use various metrics to assess a company's value such as.

 a. Earnings per Share (EPS): This measures the company's profitability and can indicate whether the share price is justified.

 b. Price to Earnings (P/E) Ratio: This compares a company's current share price to its earnings per share helping investors determine if the stock is overvalued or undervalued.

4. Market Trends: Broader market trends, economic conditions and investor sentiment also play a crucial role in determining a share's worth. For instance, during economic growth share prices tend to rise while during recessions they often fall.

5. Analyst Ratings: Analysts often provide ratings and price targets for stocks which can influence investor perception and the stock's price.
 

Conclusion

By now, we have answered one of the most frequently asked questions what do you mean by share?  Shares are small pieces of ownership in a company that corporations sell to raise money. When a company needs funds for things like research, development or expanding its operations, it issues shares. Investors and traders buy these shares which gives them a stake in the company’s success. Essentially, owning shares means you own a part of that business and as the company grows and earns more money the value of those shares can increase.