What are Shares and Types of Shares?
As a new investor, you should know that there are many stock market instruments you can invest in, including shares, derivatives, mutual funds, and bonds. Among these, approximately 18 million people are investing in the stock market.
The total investment in India is 12.9% in shares. But what are shares, shares meaning, and the differences and different types of shares? When a company wants to raise capital for operations or expansion, there are two ways to raise money: borrowing money or issuing stocks that provide part-ownership of the company. Shares represent the smallest denominations of a company’s stock and indicate the company’s ownership.
To invest in shares, one must open a Demat account, and to trade on the exchange through the broker’s platform, one must open a trading account. The investor’s bank account must be linkable to both the Demat account and the trading account, and the Demat account and trading account must have the same address.
Table of Contents
Corporations issue shares as units of ownership. Dividends are paid out when residual profits, if any, are declared for companies with shares as financial assets. Companies may issue equity shares to investors to raise capital, which is used for the growth and operation of their business. When corporations are formed, owners may give investors common stock or preferred stock. Debt capital from a loan or bond issue, debt capital is legally required to be repaid, but equity capital has no such mandate. While shares may distribute profits as dividends, they do not pay interest.
The shares of a corporation are units of equity ownership in the company. For some businesses, the shares operate as financial assets, providing equal distributions of the residual profits in dividends. A company whose stock does not pay dividends distributes its profits to shareholders instead of paying them. Rather, shareholders expect to participate in stock price growth as the company grows its profits.
As a result, shares and stock are commonly interchangeable since shares represent equity in a company. Equity shares and Preference shares are the two main types of shares.
Why Should You Invest in the Stock Market?
In the long run, investing in shares can provide an investor with inflation-beating returns and a better investment strategy than investing in stocks. Some people view shares as a risky investment, but numerous studies show that the right shares over a long period can produce a better investment result than stocks.
People also have short-term strategies when they invest in the stock market. Stocks can be volatile over short periods, but you can make quick profits if you invest in the right shares, you can make quick profits.
Types of Shares
Having understood the share definition, you must know that shares can be broadly categorized into two types:
In addition to ordinary shares, equity shares are transferrable and traded actively by investors on stock markets. Equity shares comprise the bulk of shares issued by a particular company. In addition to having voting rights on the company’s issues, equity shareholders are entitled to dividends. However, dividends are not fixed. It is also important to remember that equity shareholders are potentially more at risk due to market volatility and other factors affecting stock markets. Shares in this category can be classified according to the following:
- Share capital: The price of equity shares is determined by the amount raised by a particular company by issuing shares. A company can raise more share capital by issuing more Initial Public Offerings (IPOs). Following is a breakdown of how equity shares are categorized depending on share capital:
- Authorized Share Capital: Companies, in their Memorandum of Association, should set out the maximum amount of capital they can raise by issuing equity shares.
- Issued Share Capital: Specifically, this refers to the portion of the company’s capital that has been made available to investors through the issuance of equity shares.
- Subscribed Share Capital: The subscribed share capital represents the portion of the issued capital that investors have taken up.
- Paid-Up Capital: Paid-up capital refers to the money paid by investors for holding stocks of a company. Investors pay the entire amount simultaneously, so subscribed capital and paid-up capital are synonymous terms.
Below is a description of the equity share classification according to the following definition:
- Bonus Shares: Shares of a company-provided free of charge to existing shareholders are known as bonus shares.
- Rights Shares: A company may offer new shares to its existing shareholders – for a price and within a specific time frame – before they go on sale.
- Sweat Equity Shares: As an employee, you can earn sweat equity shares from the company if you have made a significant contribution.
- Voting And Non-Voting Shares: Although most shares hold voting rights, the company can issue differential shares with zero voting rights to employees who have made significant contributions.
Preferential shareholders prefer ordinary shareholders when receiving a company’s profits. There are many types of stock capital, but preference shares are a special kind of share capital since they have a fixed rate of dividends and preferential claims on the company’s assets to ordinary equity shares. The preferential shareholders are also paid off before common shareholders in the case of a liquidation. Here is a look at the various types of shares in this category:
Cumulative And Non-Cumulative Preference Shares Meaning
If a particular company does not declare a dividend each year, cumulative preference shares allow the dividend to be carried over to the following year.
Non-cumulative preference shares do not allow the dividend to carry out.
Participating/Non-Participating Preference Share
Participants in the company’s preference shares receive surplus profits after dividends have been paid to shareholders. It is in addition to dividends being paid to shareholders.
Convertible/Non-Convertible Preference Shares Meaning
The company’s Article of Association (AoA) stipulates the conditions and terms for converting convertible preference shares into equity shares, whereas non-convertible preference shares do not carry this benefit.
Redeemable/Irredeemable Preference Share Definition
In contrast, redeemable preference shares do not have any maturity period and can be bought at a fixed price and time. Irredeemable preference shares have no such conditions.
Supply and demand affect stock prices. The most significant factor affecting stock prices is earnings.
- The reasons for stock price movements are unclear.
- Dividend reinvestment plans (DRIPs) and brokerages are two ways to buy stocks.
- After knowing everything stands for, stock tables/quotes are difficult to read.
- Stocks represent ownership. With your shares, you have a claim on the assets and earnings of a company and voting rights.
- Bonds are debt; stocks are equity. Shareholders do not have a right to a return on their investment as bondholders do. For this reason, stocks are generally seen as riskier investments, requiring higher returns.
Business organizations need funds for the operation of their operations. They can raise funds internally or externally, implying that issuing shares and raising capital are integral components of their business process. A company in good standing can take care of its employees, directors & shareholders and motivate them to do better when they are in a good position. Getting investment from investors/shareholders helps the company to re-invest in itself.
Therefore, there are two types of shares: equity and preferred. Each of these sub-categories has its specific features and advantages. Now that you know what shares are and how they work, you are ready to begin investing. Ensure that you open a Demat and trading account with a trusted financial firm. Choose a company that provides cutting-edge trading platforms and real-time market information.
Frequently Asked Questions (FAQs)
Yes, you can buy shares for Rs. 100 or any other price depending on the market value of the stock you are interested in.
To buy shares, you typically need to open a trading account with a brokerage firm, deposit funds, research and select the stocks you want to purchase, and place an order through your brokerage account.
No, stocks are not risk-free investments. They carry inherent risks, such as market fluctuations, company-specific risks, and economic factors affecting stock prices. It’s important to assess and manage risks when investing in stocks carefully.