What is a Share -

Whenever there is mention of stock exchange, you will hear absolute mention of buying or selling of shares. But what does a share mean exactly? In order to understand how the stock market operates, one has to comprehend the view of a share within that market. Here, we will provide everything that needs to be known about a share, including what it is, how its price is set, and more about shares.

A share which is also regarded as stock and equity refers to a portion of the ownership of a company. To put it simply, when you buy a share, you are purchasing a small portion of that particular company. Investments through shares are the most acquired by people as it enables companies to source for funds and gives individuals an opportunity to invest into businesses. The question, “what is a share” revolved around how the ownership is structured in a company, and how that, in one way or the other arises in places where investors are able to partake in the profit of the business.

A share does not keep one value consistently; this is because it is subject to many factors. In order to see the rationale behind any strong variations in the price of a share, let us consider a simple case. Let us consider a hypothetical case of a company, KPIT Tech, which has a total worth of ₹10,000, goes public and seeks to offer its shares to the public. If the company decides to issue 1,000 shares, then the price per share will be calculated in the following manner:

Price per unit = Total Value Number of shares issued

Price per share = Number of shares issued Total Value

Price per share = 10,000/ 1000 = 10 rupees

It follows that for every share of KPIT Tech held by you, you own 1/1,000 which is 0.001 % of KPIT Tech. This means that you get a share of the profits and the losses of the firm and therefore to appreciate ‘What is a share’; it is essential to appreciate its significance to ownership and returns.

Types of Shares

The term ‘shares’ is a general term that applies to many types of issues each serving different purposes and conferring unique rights and powers. The types of shares include:

Equity Shares: They are the common forms of shares that characterize ownership in the shares and permit shareholders to exercise their voice in meetings of the company. A holder of ordinary shares have rights to receive dividends and a residual right over assets of the Company in the event of winding up.

Preference Shares: Unlike ordinary shares, preference shares do not carry any voting rights. Other than that, they do come with a guaranteed preferred return of a fixed rate that must be paid before any payment is made to ordinary shareholding equity owners. Preference equity shareholders have priority over equity holders in asset partitioning as well.

DVR Shares (Differential Voting Rights Shares): DVR shares do not hold as much weight in terms of voting rights as equity shares. However, these shares are mostly followed by a higher dividend. Such shares are beneficial to the companies that are in need of funds but do not want to lose power.

Why Do Companies Issue Shares?

Companies issue shares mainly for raising funds so that they can use the funds for activities such as expansion, R&D, and paying off debts. Companies have roughly two avenues to tap funds:

Debt Financing: Companies have the option of borrowing from banks or raising loans from other financial institutions. However, there is a downside of borrowing since the managers will have to pay back the borrowed amount with interest. This in turn may influence the company’s profitability. Hence, appreciating ‘what is a share’ also entails understanding the other option of equity capital.

Equity Financing: Companies will not go into debt by issuing shares in an Initial Public Offering (IPO) to raise funds. Under this arrangement, shares are bought by companies and listed on the stock exchange for sale where investors can trade the shares. With this approach, companies can be able to raise huge amounts of funds with no charge of repayment or interest.

How to Buy Shares

There has been a radical change in the process of buying shares where it was previously holding bricks of stock certificates. At present, shares are rather traded using electronic media through the NSE and BSE in India. Here’s a brief overview of how you can buy shares:

Open a Demat Account: There is a necessity to open a Demat (Dematerialised) account for purchasing and keeping shares electronically. This type of account contains the shares you own in electronic form hence making such transactions to be faster and risk free.

Choose a Broker: A variety of full-service brokers or discount brokers can be chosen based on the amount of investment you wish to allocate. Brokers provide services for buying and selling opinions as well as for trading itself and shares.

Research and Analysis: In regard to stock ownership, the analysis begins with buying into the company after understanding all the factors related to its performance and those of the securities. Make use of metrics such as financial statement analysis, industry analysis, and other emergent abilities in making evaluations.

Place an Order: After logging into the system of your broker, enter an order to buy the shares, placing the order. Orders may include but not be limited to market orders (ordering for immediate purchase of the items at the current price level) or limits orders (order to buy shares when the item reaches a specified price level).

One of the reasons many people see the rationale of equity investment is the growth in value. Growth in value of shares occurs when the market value of shares one owns appreciates over increasing periods of time. This may occur as a result of the growth of the business prospects of the company, better market conditions or efficient management and strategies.

In the case of buying shares at a lower price, and the outcome of the company’s activities contributes to the increase of its share price, then when the shares are disposed, there will be capital gains. This is the reason how the ‘what is a share’ concept leads to an understanding of share price appreciation and gain.

Different Forms of Shares

The issuance of shares can also be expressed in other forms depending on the use of capital and the behavior of the market. Some of these include:

Pledged Shares: Promoters can pledge the shares they own in companies with the aim of securing a loan. This practice is referred to as pledged shares. The presence of a high level of such pledged shares could mean there is a high level of risk hence red flags for the investors.

Right Shares: A right issue is the issuance of new shares by a company on a right basis at a lower rate to its existing shareholders in an effort to maintain the proportion owned by them in the company. Right shares are issued in order to get more funds.

Bonus Shares: Companies may also issue bonus shares to their present shareholders to encourage their retention. This kind of shares is given to the shareholders from the retained earnings of the company and does not call for further investments from shareholders.

Sweat Equity Shares: Such shares are allotted to the employees or the directors for their work or contribution to the firm, either as payments to employees or as a reward.

Stock Split and Reverse Stock Split: A stock split raises the total number of outstanding shares of stock while surrendering the equivalent total value of stock by reducing its rate making it easier to buy. On the other hand, a reverse stock split reduces the total amount of the outstanding shares of stock in circulation with the intention of raising the rate of the stock as well, a strategy for avoiding delisting.

Dividends and benefits for shareholders

A dividend is an amount deducted from a company’s earnings and awarded to its registered shareholders as a return on their cash investment. Corporate units committed to regularly rewarding their investors with dividends have been viewed as leaning towards health and profitability. With dividends, shareholders of a company get another form of income from investments which makes investing in stocks appealing.

On the flipside, organizations that opt to use their net income in building up their business as opposed to issuing dividend may be able to offer investors with a possible immense returns on their capital in the future. It is for this reason why certain types of investors will have a preference for the dividend-inexistant companies that instead focus on boosting the scope of their operation.( What is a Share)

Conclusion.

As to conclude, the knowledge of what is a share is important for everyone who wants to engage in buying stocks. Shares are a title of ownership in the company that has issued them and that ownership can gain or lose value. For the need of development, companies sell shares of their stock. When we are talking about shares of stock, we imply the share will be purchased by someone expecting to profit from the success of the company. (What is a Share)

Such understanding of the share instruments, their acquisition process, and the need and potential for their appreciation will assist you in making the right investment decisions. Even if you are a beginner or wish to expand what you already know, understanding what shares are and how they function is very important in this stock exchange world that one works in.

So next time that you are told about shares, think about this: they are not merely a piece of paper—they actually represent a claim to a proportion of the company and a means of earning money as a very low level of risk.

(What is a Share What is a Share)