What are Shares? Learn Types of Stocks, Benefits, Examples & Importance
Shares work just like pizza slices do. No jokes!
Imagine a large pizza divided into several equal slices, say 8. Now, consider each slice of the pizza as a share and the entire pizza as a company. Thus, just as you can eat multiple slices of pizza, you can also buy multiple shares to own a larger stake in a company.
To put it simply, in the stock market, when someone buys a share of a company’s stock, they purchase a portion of ownership, just like owning a slice of pizza.
Still, figuring out what are shares and its types? Let’s understand it better by diving deep into this blog.
What are Shares in a Company?
Shares are units, also known as stocks or equities, representing ownership in a company. Some companies consider them as financial assets. So, a company can issue shares and stocks to investors. As a result, the capital generated can be used to fund its operations, expand its business, or make acquisitions. As a result, investors become part owners of the company shares and are entitled to a portion of its profits and assets.
Stocks and IPO
When private companies opt to offer shares to the general public, they undertake an initial public offering (IPO). The term “going public” signifies the stock company’s initiation of an IPO, making shares available for purchase by investors through public stock markets.
Throughout an IPO, the company, alongside its advisors, discloses the quantity of shares to be issued and establishes an IPO price. The funds generated from the sale of stock during an IPO are directly allocated to the company.
Upon the completion of the offering, the shares become tradable on the secondary market, commonly referred to as “the stock market.” In this arena, the stock’s value fluctuates based on a myriad of influencing factors.
Features of Shares
Here is a list of features of shares below:
- Ownership Stake: Shares represent ownership in a company, providing shareholders with a stake in the company’s assets and earnings.
- Dividends: Shareholders may receive dividends, which are a portion of the company’s profits distributed to them.
- Voting Rights: Shareholders often have the right to vote on important company decisions during shareholder meetings.
- Capital Gains: Shareholders can benefit from capital gains when the value of their shares increases over time.
- Transferability: Shares are generally easily transferable, allowing shareholders to sell or transfer them to other investors.
- Risk and Returns: Investing in shares involves risk, but it also offers the potential for higher returns compared to more conservative investment options.
What are the Different Types of Shares?
When it comes to investing in the stock market, several different types of shares are available for purchase. Here’s a brief overview of each share types:
- Common Shares: For those wondering what are equity shares and the types of equity shares, they represent ownership in the company and entitle the shareholder to a portion of its profits and assets. Common shareholders also have voting rights, which allow them to participate in important decisions.
- Preferred Shares: These typically offer a fixed dividend payment, providing a more stable income stream for investors. Preferred shareholders usually have priority in all types of preference shares over common shareholders when it comes to receiving dividends and getting their money back in the event of a liquidation.
- Treasury Shares: These are issued by the company but then repurchased and held in its treasury. The company can sell back these shares to the market later if it needs to raise capital. These shares have no voting rights and do not pay dividends
- Voting and Non-Voting Shares: As the name suggests, voting shares give the shareholder the right to vote on important company matters, while non-voting shares do not. Non-voting shares of a company may often have lower prices than voting shares since they offer fewer rights and benefits.
- Class A and Class B Shares: Some companies may issue different classes of shares, each with different voting rights or dividend payment structures. For example, Class A may have more voting rights than Class B.
- Growth and Value Shares: These are expected to have high growth rates and earnings potential in the future, while value shares are currently undervalued by the market and may provide good returns in the long term.
Different Classes of Shares of a Company
After understanding the different kinds of shares, let’s understand their classification. The classification of equity shares is often designated by a letter. Companies commonly issue various classes of shares, often identified by letters such as A, B, or C. Diverse share classes, distinguished by specific voting rights, serve to empower company founders or executives in maintaining greater control.
A prime example is Alphabet, the holding company of Google, which has three classes of stock. Class A shares (GOOGL) confer one vote per share, while Class B shares, held by company founders, grant 10 votes each, aiding in control retention. Not publicly traded, Class B shares are instrumental in preserving founders’ influence. On the other hand, Class C stock (GOOG) lacks voting rights and is predominantly owned by employees and certain common shareholders. This strategic issuance of different share classes may allow nuanced governance and control dynamics within the company.
Types of Dividends
Depending on the category of shares an investor holds, companies distribute profits through dividends. Dividend payments, which occur quarterly or annually, are proportionate to the number of shares owned by the investor in the company.
Preferred shareholders are potentially on priority in receiving dividends compared to common stock shareholders. The principles governing dividends remain consistent, irrespective of the type of stock an investor holds.
Companies may opt to release stock dividends, wherein shareholders receive additional shares based on a declared percentage. For instance, if a company declares a 5% stock dividend and an investor holds 100 shares, they would receive five additional shares, resulting in a total of 105 shares. Despite the increase in the number of shares, the value of each share decreases by 5%, maintaining the overall value of the investor’s holdings.
How are Shares Regulated?
Shares are regulated in India through a collaborative effort between regulatory bodies like the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). SEBI, established in 1992, plays a central role in overseeing the stock market, enforcing regulations, and promoting investor education. The RBI formulates monetary policies that impact market liquidity and borrowing costs. Both entities work together to regulate foreign investments, ensuring a secure and transparent mechanism for transactions in the share market. Stock exchanges like NSE and BSE provide platforms for companies to issue shares, with indices like Nifty and Sensex measuring market performance.
What is Shareholder Ownership?
Shareholder ownership refers to the partial possession of a company by individuals or institutions holding its shares. These shares, commonly called stocks, act as certificates representing a proportional claim to the company’s assets, profits, and voting rights. Here’s a breakdown of the key aspects:
Ownership Proportion
- Each share represents a small ownership stake in the company. The more shares you hold, the larger your ownership percentage.
- Owning a majority of shares grants significant control over the company, influencing decisions and potentially appointing board members.
Rights of Shareholders
- Dividend Distribution: Shareholders are entitled to a portion of the company’s profits, distributed as dividends if declared by the board.
- Voting Rights: Shares usually come with voting rights on important company matters like mergers, acquisitions, or dividend policies.
- Capital Appreciation: Share prices can increase over time, resulting in potential capital gains when selling the shares.
- Information Rights: Shareholders are entitled to receive regular updates on the company’s financial performance and operations.
Types of Shareholders
- Individual Investors: People directly buying and holding shares in their names.
- Institutional Investors: Banks, mutual funds, and other organizations investing on behalf of clients.
- Majority Shareholders: Individuals or groups holding a controlling stake in the company.
Performance Metrics of Share Prices
After understanding shares meaning and types, let’s focus on the financial performance of a company’s shares over time. Here are some of the most common performance metrics of share prices:
- Company Performance: The financial performance of a company, including its revenue, earnings, and growth prospects, can have a significant impact on its share price. Positive financial results can drive share prices up, while adverse effects can cause them to fall.
- Industry Trends: Economic and market conditions within a particular industry can also affect share prices. For example, changes in interest rates, commodity prices, or regulatory policies can impact the performance of companies.
- Investor Sentiment: The perceptions and attitudes of investors can also influence share prices. Positive news or investor sentiment about a company can drive share prices up, while negative news or sentiment can cause them to fall.
- Macroeconomic Factors: Broader economic conditions, such as inflation, unemployment, and geopolitical events, can also impact share prices. During times of economic growth and stability, share prices rise, but during times of economic instability, share prices fall.
- Company-Specific Events: Events such as mergers and acquisitions, changes in management, or legal disputes can also affect share prices. Negative news can damage investor confidence while positive news can boost them.
Why Does a Company Issue Shares?
Companies primarily release shares to secure funds for operational needs, growth, and expansion. Additionally, they may issue equity shares for purposes such as:
- To raise capital for the company’s various other operations
- Obtaining a listing on the stock market
- Enhance visibility
- Extending their market presence
How to Buy and Sell Shares?
Stockbrokers or online brokerage platforms facilitate the buying and selling of shares. Here are the basic steps that you can follow:
Buying
- Choose a Broker: Select a reputable stockbroker or an online brokerage platform. You will need to create an account and provide personal and financial information to get started.
- Research Stocks: Research the stocks you are interested in buying. This may include analyzing the company’s financial statements, growth prospects, and industry trends.
- Place an Order: Once you have selected a stock, place an order with your broker or online brokerage platform.
- Pay: After placing your order, you will need to fund your account. You can do this through a bank transfer, debit card, or other payment methods.
- Monitor: Keep an eye on investments and make adjustments based on market conditions or changes in the company’s financial performance.
Selling
- Decide to Sell: Determine the right time to sell your shares based on market conditions and investment goals.
- Place an Order: Place a sell order with your broker or online brokerage platform. You can either place a market order (sell at the current market price) or a limit order (sell at a specific price).
- Receive Payment: Once you sell your shares, we will deposit the proceeds into your brokerage account.
- Evaluate Your Investment: Evaluate your investment performance and consider reinvesting the proceeds into other stocks or securities.
Benefits of Owning Shares
There are several benefits of owning shares, including:
- Potential for Capital Appreciation: Shareholders can benefit from an increase in the stock’s price over time, resulting in capital gains.
- Dividend Income: Companies may pay out a part of their profits to shareholders in the form of dividends, providing a source of regular income.
- Ownership Stake: While stocks give you ownership share in the company, it means you’re trusting the company’s leaders to run the business
- Diversification: Investing in a range of stocks or doing portfolio investing can provide diversification benefits, reducing overall portfolio risk.
- Liquidity: Investors can easily buy and sell shares, which provides them with liquidity and flexibility.
- Corporate Actions: Shareholders may be eligible to participate in corporate actions, such as stock splits, rights issues, mergers and acquisitions.
- Social Responsibility: Some investors invest in companies that align with their social or environmental values to advocate for change.
How Do Stocks, Shares and Equities Work?
Stocks, shares, and equities represent ownership in one or more companies. Shareholders receive dividends and voting rights if granted by the company. Although the terms are often used interchangeably, there are some differences that one must be aware of.
- ‘Stocks’ commonly denotes ownership portions across various companies; for instance, one may own stock in both Amazon and Microsoft.
- ‘Shares’ typically signifies ownership units in a particular company; for example, an individual might state ownership of ten shares in Amazon.
- ‘Equity’ represents the overall ownership interest in a company; if a company has 10,000 shares and one owns 1000, they hold a 10% equity stake.
Key Differences – Stock vs Shares
Here are the key distinctions between stocks and shares:
- Ownership: Owning shares in various companies collectively constitutes owning stocks. Thus, if an investor holds shares in a single company, they are considered the owner of those shares.
- Denomination: Stock ownership offers flexibility with various stock values. Thus, shareholders in a specific company may own multiple shares, but these shares hold equal value.
- Paid-Up Value: Stocks are typically fully paid up. However, shares may be partly or wholly paid up.
- Nominal Value: Nominal value indicates the voting rights that may differ from market value. It fluctuates based on share demand and supply dynamics.
What is the Difference Between Stocks and Bonds?
Companies issue stocks as a means of raising capital for business expansion or new ventures. It’s crucial to distinguish whether an individual acquires shares directly from the company in the primary market or from another shareholder in the secondary market. In the primary market, when a corporation issues shares, it receives money in return.
Bonds differ from stocks in several aspects. Bondholders may act as creditors to the corporation, earning interest and expecting the return of the principal invested. In the event of bankruptcy, creditors have legal precedence over other stakeholders and are prioritized in asset liquidation, ensuring they are repaid first.
Conversely, shareholders may not receive any compensation in the event of bankruptcy, highlighting that stocks inherently may carry more risk compared to bonds.
Example of Shares
Now that we understand, ‘what is a share?’ Let’s take a look at the example.
Hindustan Unilever wants to raise capital to finance the development of a new product line. The company decided to issue one thousand shares of stock, each priced at Rs.100. Thus, investors who believe in the company’s prospects can purchase these shares, either through a stockbroker (a third-party SEBI-registered professional) or through an online trading platform.
Suppose you bought 100 shares of Hindustan Unilever at Rs. 1000 per share, which means you have Rs. 1 lakh in the company. Thus, as a shareholder, you have a claim on a portion of the company’s assets. The company will typically make payments to shareholders out of its earnings, in the form of dividends. Thus, as a shareholder, you will be entitled to a portion of the company’s profits.
The terms ‘shares’ and ‘stocks’ are used interchangeably., However, for those who are confused about “What are dividends in a stock?”, dividends can be considered as a corporate action where a corporation pays its shareholders out of its profits or retained earnings.
You Can Mitigate the Risks with smallcases!
Investing in shares can provide significant benefits. However, you can also mitigate the risks of investing in shares with smallcase. Let’s understand how.
- Market Risks: Market risks are related to changes such as economic downturns, geopolitical events, and fluctuations in interest rates. Investors can mitigate these risks by investing in a diversified portfolio or smallcases, even though complete elimination of these risks is not possible.
- Company-Specific Risks: Company-specific risks can include poor management decisions, industry-specific risks, or legal and regulatory issues. Thus, our experts at smallcase execute detailed research of the companies to keep risks at bay.
- Liquidity Risks: Liquidity risks refer to the possibility of being unable to sell your shares when you want to. Additionally, taking a long-term investment approach and being patient during market volatility periods can help reduce liquidity risks’ impact.
However, if you’re confused about which stocks to pick, you can explore smallcases:
- smallcases are readymade portfolios of stocks/ETFs, that are based on a theme idea or strategy
- They’re created and managed by SEBI-registered experts
- smallcase.com offers over 200+ stock portfolios, created by 180+ managers
- Some of the popular smallcases among new investors are as follows:
Disclosures for aforementioned smallcases
To Wrap It Up…
In conclusion, shares are units of ownership in a company representing a claim of its assets and earnings. They are a popular investment option for individuals looking to grow their wealth long-term. Since every investment carries a certain degree of risk, it becomes important to diversify the portfolio by adding different asset classes to your basket of stocks.
So, what are you waiting for? Start your investment journey with smallcase today!
As always, investors must do their own research and/or consult their financial advisor before investing.
FAQs
The company shares are issued to raise capital for business expansion, pay off existing loans/ debts, enhance visibility and offer employee compensation to incentivize and retain talent.
Share meaning in finance represents units of ownership in a company. Owning shares means you hold a piece of the pie, entitled to potential profits (dividends), voting rights, and capital growth, but also sharing risks and facing market fluctuations. Think of them as tiny ownership slices of a business.
There are two main types of share capital i.e. Equity (voting rights & potential for high returns) and Preference (fixed dividends & priority in liquidation). Additionally, you can find authorized (maximum issuable), issued (actually released), subscribed (committed by investors), called-up (paid-in portion), and paid-up (total invested) categorizations.
There is no limit on the number of shares that a particular entity can possess in a given company.
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