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Home Finance The Ultimate Guide To Shares

The Ultimate Guide To Shares

Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business. – Warren Buffett

Do you actually know what are shares? You might or might not know, as most of the people think of the stock market as a gambling spot, where they can wager money with an uncertainty of either having gains or losses.

But is this the correct definition?

The answer is NO it is not, while you are trading in shares you are actually indulging yourself in buying and selling part-ownership of a business.

Hopefully, after reading this blog all your concepts and myths related to the stock market will be cleared.

Whats in it for me

  1. SHARES
  2. TYPES OF SHARES
  3. EQUITY SHARES
  4. PREFERENCE SHARES
  5. TYPES OF PREFERENCE SHARES
  6. FEW TERMS RELATED TO SHARES
  7. CONCLUSION
  8. FREQUENTLY ASKED QUESTIONS (FAQ)

SHARES

SHARES are financial instruments which the private as well as public companies issue to raise funds from the market.

The capital of a company is divided into a large number of parts solely called SHARE.

Eg. A company has total share capital as 1,00,000 

It can issue 1000 shares @ Rs.10/ share.

 This issuing of securities for raising funds is very beneficial for big companies as there is no need for any security or fixed asset to raise money.

This fund is a permanent source of capital for any company.

Hence,The capital raised from this source of funds is called share capital.

All the individuals who hold one or many stocks of any company are called its shareholders.

Shareholders are paid DIVIDEND over each stock they hold if there are sufficient profits. In case of losses dividend might not be.

Moreover, being owners of the company you have to bear losses.

A PUBLIC COMPANY can issue two types of shares → 

types-of-shares
Types of shares

i> EQUITY SHARES

ii> PREFERENCE SHARES

 The prior form of issuing of securities was share certificates but nowadays their issue digital. Nowadays, DEMAT A/C is necessary for any transaction in the share market.

So if you are interested in buying ownership of any company it is necessary to have Demat A/C along with a Savings A/C.

Moreover, it is always advisable to appoint a broker to help you with your transactions. Brokers are agents of the stock market.

They help you in all the transactions related to the share market, Eg. Buying and Selling of shares, and in return charge commission or their service. 

TYPES OF SHARES

types of shares
Equity vs preference shares

THERE ARE TWO TYPES OF SHAREHOLDERS 

1> EQUITY SHARES

2> PREFERENCE SHARES

1>EQUITY SHARES

equity
Equity shareholders have Equal voting rights

  Equity shareholders provide capital on a permanent basis. These shareholders stand a higher chance of risk as there is no promised dividend to these shareholders, you will get any bonus or divided only if a company is making enough profits but simultaneously higher risk comes along with the chance to win higher profits.

  Hence, Equity shareholders are true owners of a company.

Equity shareholders also have the RIGHT TO VOTE if they have a significant share in the company. They elect the board of directors of the company and frame policies in the general meeting of the company.

At the time of winding up of the company, the equity shareholders get their payments paid back only after settling all the payments of the company including the preference shareholders.

FEATURES OF EQUITY SHARES → 

  1. Equity share can be the basis on which a firm raises loan as this is a source of confidence to the loan providers.
  2. There is no security of any fixed asset for the shareholders.
  3. There is the uncertainty of return, in one year you can earn a 20% dividend but the next year you can all face losses.
  4. Equity shareholders have voting rights.
  5. This equity share capital is irredeemable for the company until it exists.

2>PREFERENCE SHARES→

prefrence shalreholders have priority- share market
Preference shareholder

Preference securities are those which carry preferential rights as to dividend at a fixed rate and as to repayment of capital.

It is possible to convert them into equity.  They are redeemable during the lifetime of the company. These have no voting rights.

The two preferential rights of preference shareholders over equity shareholders are →

  • Preference shareholders receive a fixed rate of dividend out of the net profits of the company before the distribution of dividend on equity.
  • There payment of capital at the time of winding up of the firm before the equity share capital.

FEATURES OF PREFERENCE  SHARES→ 

  1. Preference shareholders do not have any voting rights.
  2. If you have cumulative preference securities and there is a non-payment of dividends in a particular year, then the dividend will not be carried forward the next year.
  3. If preference shares are redeemable, they will be retired at the end of the term.

 TYPES OF PREFERENCE SHARES

Preference shares are of various types some of them are as follows → 

1> CUMULATIVE PREFERENCE SHARES→ 

As preference shares give a fixed rate of dividend every year, even during losses.

So cumulative preference securities are those which do not give dividends the year the company faces losses, but there is an accumulation of dividends and the shareholder get it next year. 

 2> NON-CUMULATIVE PREFERENCE SHARES →

These are the opposite of cumulative preference shares, these shareholders have paid from the profits of the same financial year hence if the company is in losses then they will not get the dividend either this year or the next year 

i.e there is there is no accumulation of dividend.

3> REDEEMABLE PREFERENCE SHARES →

These are those preference securities that have redemption after a fixed period of time.

That is the shareholders get their money back from the company. These are in accordance with the terms of the issue.

4> IRREDEEMABLE PREFERENCE SHARES →

These are those securities which company cannot redeem until it exists.

Nowadays, according to companies amendment act 1988, no company can issue irredeemable securities and redeemable securities with a maturation date greater than 20 years.

5> PARTICIPATING PREFERENCE SHARE → 

Participating preference shares are those which give two basic preferential rights → 

  1. A right to participate in surplus profits left after paying the dividend to the equity shareholders.
  2. A right to participate in surplus assets left after the repayment of capital to the equity shareholders on the winding up of the company.

6> NON-PARTICIPATING PREFERENCE SHARE → 

These non-participating preference shareholders don’t get these preferential rights.

7> CONVERTIBLE PREFERENCE SHARES → 

If the preference shareholders get the right to convert their preference shares into equity, then these are convertible preference shareholders.

7> NON-CONVERTIBLE PREFERENCE SHARES → 

If the preference shares could not be converted to equity after its maturation then these are non-convertible preference shares.

AUTHORIZED SHARE CAPITAL

It is the total capital that a company can raise from the market. there is a mentioned in the memorandum of association of the company.

A company cannot issue securities beyond this limit but total capital issued from the market can be less than authorized capital.

ISSUED SHARE CAPITAL →

It is the part of authorized share capital against which there is issue of money from the market.

It is the face value of total issued securities.

RIGHT SHARES→

right-issue
Right issue

These are the securities that a company offers to its existing shareholders to protect their ownership in the firm.

These issue is at a price less than the existing market price.

BONUS SHARES→

 bonus-shares
Bonus shares

These securities are allotted by the company to its existing shareholders for free in place of dividends.

These are allotted in a certain ratio.

Eg. 1:1 means 1 share is allotted for every 1 share held.

       1:5  means 1 share is allotted for every 5 held.

SWEAT EQUITY SHARES→

Sweat equity are those that are allotted by the company to its directors or employees as a reward.

There allotment is in place of cash. 

ISSUE PRICE→

It is the price at which the company issues them to investors. Most of the time face value and the issue price is the same for the company.

SHARE AT DISCOUNT →

Money rain

The issue of Share at a price lower than its face value is a share at discount.

SHARE AT PREMIUM→

Securities that are issued at a price higher than its face value are called shares at a premium.

Hence, This excess amount is called a premium.

INTRINSIC VALUE→ 

It is the value of company stocks, currency, or products according to the fundamental analysis of a company. Therefore, It is the real value and may or may not be the same as the current market value.

ALSO READ MY BLOG – TOP 2 BOOK SUMMARIES EVERY INVESTOR MUST READ

CONCLUSION

From the above blog we conclude that –

SHARES

SHARES are financial instruments which the private as well as public companies issue to raise funds from the market.

2 TYPES OF SHARES

1> Equity shares –> They provide capital on a permanent basis.

2> Preference shares –> Preference securities are those which carry preferential rights as to dividend at a fixed rate and as to repayment of capital.

TYPES OF PREFERENCE SHARES

Indeed, In this blog we have discussed about various different types of preference shares.

FEW TERMS RELATED TO SHARES

Few terms like Authorized share capital , Right issue etc have been discuses in this blog.

ALSO READ – CAN STOCK MARKET MAKE YOU RICH

FREQUENTLY ASKED QUESTIONS (FAQ)

Q1. What does it mean by buying shares?

Buying a share of stock of a company simply means you are buying a unit of the company. Investors are able to buy the stocks of the company once the company share is launched in the market.

Q2. What is the difference between stocks and share?

Stock is a general term used to describe the ownership certificates of any company, and shares refers to the ownership certificates of a particular company. 

Q3. Which is the costliest share in India?

MRF Ltd. Share 

Q4. How do shareholders get paid?

There are two ways to make money from owning shares of stock: dividends and capital appreciation. Dividends are cash distributions of company profits. … Capital appreciation is the increase in the share price itself. If you sell a share to someone for ₹10, and the stock is later worth ₹11, the shareholder has made ₹1.

Q5. Do shareholders get paid monthly?

A dividend is a sharing of company profits to shareholders. Not all stocks pay dividends, but the ones that do usually pay cash to investors every quarter. Some even make payments every month.

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