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If you’ve ever wondered what shares are or heard someone mention the different types of shares, this guide is just for you. We’ll break down everything you need to know, using simple language and engaging examples, so you can confidently join conversations about this topic. Let’s dive in.
What are shares in a company?
Imagine you have a delicious pie. If you cut that pie into pieces, each piece represents a share of the pie. In the business world, a share is like that piece of pie. But instead of pie, it represents a piece of a company. When you own a share, you own a part of that company.
Shares in a company, commonly referred to as stocks or equities, signify fractional ownership in that corporation. Viewed as financial assets, these shares provide investors with a stake in the company’s future performance and underlying value.
Companies issue shares to raise capital from the public. Investors buy shares because they offer dividends and capital appreciation.
Features of shares
Shares come with a set of characteristics. Here are some of the main features:
- Ownership: Having shares means you have a slice of the company. The more shares you have, the bigger your slice.
- Dividends: Companies sometimes distribute a portion of their earnings to shareholders. This payout is called a dividend.
- Voting rights: Shareholders often get a say in important company decisions, like electing board members.
- Transferability: Shares can be sold or bought in the stock market.
Types of shares
- Equity shares: Often called stocks, equity shares represent the core ownership of a company. They offer dividends and voting rights to the holders. Equity shareholders are last on the list while paying off during liquidation.
- Preference shares: Preference shares are more stable. They do not come with voting rights, but they get fixed dividends and preferential payout during liquidation.
What are shares in terms of share capital?
Share capital refers to the money a company raises by issuing shares. For example, if a company issues 1000 shares at $10 each, its share capital is $10,000. Share capital can be of different types, based on the types of shares issued:
- Equity share capital: Money raised from issuing equity shares.
- Preference share capital: Money raised from issuing preference shares.
Consider a fictional company GreenTech deciding to raise money by issuing 100 equity shares at Rs. 50 each. This means their equity share capital would be Rs. 5000.
Types of share in the stock market
When diving into the intricacies of stock market investment, you’ll encounter a rich tapestry of share types, each with unique characteristics and advantages. Let’s delve into a concise yet enlightening summary of these:
- Common shares – Common shares form the backbone of equity ownership in a company. Common shareholders get a stake in the firm’s assets and profits with voting rights.
- Preferred shares – Preferred shares are for investors seeking a more predictable income, usually through fixed dividend payments with priority payout during liquidation.
- Treasury shares – These are repurchased shares in the company’s reserve, re-issued when there is a need. They do not offer voting rights or dividends.
- Voting vs. non-voting shares – While voting shares empower you with a voice in crucial company matters, non-voting shares are lower priced and come without this privilege.
- Class-A and Class-B shares – Some companies diversify their share structure by offering Class-A and Class-B shares with different benefits in terms of voting power or dividend distribution.
- Growth and value shares – Growth shares are the darlings of the future, expected to experience exponential growth and earnings. Value shares, on the other hand, are the hidden gems—often undervalued but with a promising outlook for long-term returns.
How can you invest in shares?
- Research: Begin by understanding the companies you’re interested in. Look into their performance, plans, and overall industry health.
- Start small: If you’re new, consider starting with a small investment to get a feel for the market.
- Consult: Talk to financial experts or use investment platforms that offer advice and insights.
- Stay informed: The world of shares is dynamic. Keep yourself updated with the latest news and trends.
Wrapping up
Understanding the essence of “what is a share” and exploring the “types of shares” provides a solid foundation for anyone interested in the business and financial domain.
Remember, the world of shares is as much about knowledge as it is about intuition. As you keep learning and engaging with the market, you’ll develop insights that will guide your journey.
FAQs
Par value is the face value of a share, determined by the issuer at the time of the first issue (During IPO). Unlike market value which changes based on demand and supply, the par value of shares remains constant.
The four main types of preference shares are:
Convertible shares – Will be converted to equity after a specific period.
Cumulative shares – All unpaid dividends must be paid to cumulative preference shareholders before others.
Redeemable shares – Can be redeemed at any time before liquidation.
Participating shares – Shares with the right to participate in profits, over and above the fixed dividend.
Similar to equity shares, preference shares also require demat and trading accounts. However, preference shares may not be offered by all brokers. Hence, traders must look for brokers who offer preference shares and register a demat account with them.
Right shares are shares issued to existing shareholders at a discount when the company wants to raise additional share capital.
Bonus shares are given to existing shareholders free of cost, instead of dividend payments.