BAJAJ BROKING
September 02, 2023
7 mins read
Shares represent a unit of ownership in a company, offering investors a portion of the company's assets and profits. When individuals purchase shares, they essentially become part-owners of the business. Shares are crucial to companies as they allow them to raise capital for growth, expansion, or to meet operational needs. For investors, shares provide an opportunity to grow wealth based on the company’s performance in the stock market.
There are mainly two types of shares: equity shares and preference shares. Equity shares, also known as ordinary shares, give shareholders voting rights and a claim to a portion of the company's profits, though dividends are not guaranteed. Preference shares, on the other hand, offer fixed dividends and have priority over equity shares when it comes to dividend payouts, but they often do not carry voting rights. Both types of shares serve different investor needs, with equity shares appealing to those seeking long-term growth, while preference shares attract investors looking for stable income.
Shares represent ownership in a company. By holding shares, an investor is entitled to a portion of the company's profits and assets. These shares are issued by companies to raise capital and provide individuals with an opportunity to grow their wealth through equity investments.
Shares are primarily divided into two categories: equity shares and preference shares. Equity shares represent partial ownership in a company and come with voting rights, whereas preference shares typically guarantee fixed dividends but may not have voting rights. Companies may issue shares to expand their business, cover debts, or finance new projects.
Investing in shares allows individuals to participate in the growth and success of businesses. The stock market provides a platform where shares are bought and sold, reflecting the supply and demand dynamics of these financial instruments.
A common question in the minds of trading just starting out is, “So, what are stocks?”. Shares and stocks are terms often used interchangeably. They refer to the same concept: ownership in a company. When a company decides to raise funds, it divides its ownership into smaller units, which are shares or stocks. These units are then sold to individuals or entities, allowing them to become shareholders.
The terms 'stock' and 'share' are often used interchangeably, but there is a subtle difference between the two. While 'shares' refer to a specific unit of ownership in a company, 'stocks' are a more general term that refers to the overall ownership in one or more companies.
Stock vs Share
Aspect | Stock | Share |
Definition | Represents ownership in multiple companies | Represents ownership in a single company |
Ownership Unit | Can be a collection of shares | Specific unit of a company's capital |
Trading | Stocks are traded in bulk | Shares are traded individually |
Company Association | Can refer to multiple companies | Tied to one specific company |
Now you know the definition of shares. You should also know, shares exist of various types, each with their unique attributes. Let’s explore the different types of shares that companies offer:
These are the most common type of shares and form the foundation of a company’s ownership structure. Ordinary shareholders have voting rights in company decisions and share in its profits. Within ordinary equity shares, there are subtypes that shed light on the company’s financial structure and the extent of shareholder participation.
If you prefer stability over voting power, preference shares might be your cup of tea. These shares come with a fixed dividend and are paid out before ordinary shareholders receive their share of profits.
A variation of preference shares, cumulative preference shares ensure that if the company can’t pay dividends in a particular year, they accumulate and must be paid before any dividends to other shareholders.
These types of shares do not gather unpaid dividends. If the company chooses not to distribute a dividend, it will not be carried forward.
Convertible shares come with a twist. They can be converted into ordinary shares after a predetermined period or under specific conditions.
As the name suggests, these shares cannot be converted into ordinary shares. They remain as they are, offering stability but without the potential for transformation.
Some companies issue shares with an expiry date. These shares are redeemable after a certain period or under specific circumstances, providing a defined exit strategy.
Companies sometimes offer existing shareholders the first opportunity to buy additional shares before they’re offered to the public. These are rights shares. Shareholders can exercise this right in proportion to their existing shareholding.
Bonus shares are additional shares given to existing shareholders without any cost associated with them. Companies may offer bonus shares in lieu of cash dividends. Rewarding shareholders and/or increasing the company’s liquidity in the market are two of the most prominent reasons why companies issue bonus shares. After the issuance of bonus shares, the value of each share reduces, however, your total investment amount remains as it was.
Dividend shares are a popular choice for investors seeking regular income from their investments. Usually, these shares are offered by companies that have a consistent track record of distributing a part of their profits to shareholders in the form of dividends. Dividend share are often referred to as income shares and are popular among those investors who value stability and a steady flow of income, as they can supplement your income without having to sell your shares.
Growth shares belong to companies that are likely to grow rapidly and higher than their sectoral average, in the future. These companies reinvest their profits back into their business to fund their growth and expansion, instead of disbursing them as dividends. Growth share, also known as capital appreciation shares, are well-suited for investors with a long-term horizon, patience, and a higher risk tolerance. However, it’s important to note that growth shares can be more volatile in nature, and investments in these should be backed by through research and careful planning.
Value shares belong to companies that are trading at a price lower than their deemed intrinsic value. Investors on the look out for companies with undervalued shares (lower current value than their actual worth), are likely to invest in value shares. Value investing requires thorough research and a long-term perspective, as it may take time for the market to correct its valuation.
Beyond these subtypes, companies can further tailor their shares to meet specific needs. Some shares may carry higher voting rights, ensuring certain stakeholders have a stronger say in company matters. Others may come with restrictions on selling or transferring, offering a unique blend of benefits and limitations.
Also Read: How To Apply Buyback of Shares?
Shares are the building blocks of ownership in a company. They grant you a slice of the company’s success and, sometimes, a role in its decision-making. From ordinary shares to preference shares, the world of shares offers a diverse range of options for investors. So, whether you’re a novice or a seasoned investor, understanding the meaning of shares and being able to differentiate among the various types can empower you to make informed financial decisions and embark on your journey in the exciting world of investments.
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Stocks represent ownership in one or more companies, while shares refer to ownership in a specific company. Both allow participation in a company’s growth.
Shares are issued through Initial Public Offerings (IPO) when a company first goes public, or through secondary offerings by already listed companies.
Shares can be purchased through a Demat account and a stockbroker. Investors places buy orders on stock exchanges like the NSE or BSE.
Share prices fluctuate based on factors like company performance, economic conditions, investor sentiment, and market demand.
The two main types of shares are equity shares, which provide voting rights, and preference shares, which offer fixed dividends.
Penny stocks are low-priced shares of smaller companies, often traded below Rs. 10 per share and are considered high-risk investments.
Researching company fundamentals, market trends, and consulting financial experts can help investors choose the right shares to invest in.
Primary shares are issued directly by the company during an IPO, while secondary shares are traded between investors on the stock exchange.
Selling shares in India is subject to capital gains tax, with the rate depending on whether the investment was short-term or long-term.
Preference shares typically offer fixed dividends but may lack voting rights, while equity shares provide voting rights and variable dividends.
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