What are Shares?

Introduction

The stock market has dominated morning news stories for the past few months. Investing in stocks has become the most common strategy to achieve your financial objectives and build long-term wealth. In India, retail investors increased by a staggering 150 lac in FY21. Currently, 12.9% of all investments in India are stocks or equity shares. Investors must have a fundamental understanding of the components and operation of the stock market. 

If you are wondering ‘what is shares’ then keep reading as we dive along the details on what is shares, the types of shares, why you should invest in shares, etc.
 

Understanding the concept

Every individual who wants to become a seasoned investor must take some time out to thoroughly understand about the variety of stock market instruments that you can invest in. Shares are one such source of investments that have become popular among investors today. There are about 18 million investors that are dedicatedly investing in stocks and the equity market as a whole. A study suggests that stocks and equities account for about 12.9% of the overall investments in India. Shares are nothing but the smallest denomination of a corporation’s stocks, determining partial ownership of a corporation. Given below is a complete guide to what shares are and how they are distinguishable from stocks.

What do you mean by Shares?

In simple terms, shares refer to a portion of ownership of the respective company. As a shareholder of a corporation, you are the investor of the company and thus own a portion of the issuing company. Furthermore, shareholders also have an edge over the company’s profits and simultaneously, also have to face the consequences of a company’s losses.

Different Types of Shares

In stock market, shares are classified into two categories. These include - 

• Equity Shares

• Preference 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 based on -

• Share capital

• Definition

• Returns

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.

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.
 

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, which is why 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 acquire 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 INR 100. One can start small thanks to no costs and the opportunity to acquire fractional shares with several online brokers.