What are Shares? Meaning, Types and Benefits
Shares work just like pizza slices do. No jokes!
Imagine a large pizza divided into several equal slices, say 8. Now, consider each slice of the pizza as a share and the entire pizza as a company. Thus, just as you can eat multiple slices of pizza, you can also buy multiple shares to own a larger stake in a company.
To put it simply, in the stock market, when someone buys a share of a company’s stock, they purchase a portion of ownership, just like owning a slice of pizza.
Still, figuring out what shares are? Let’s understand it better by diving deep into this blog.
What are shares in a company?
Shares are units, also known as stocks or equities, representing ownership in a company. Some companies, consider them as financial assets. So, when a company issues shares of stock to investors, the capital generated can be used to fund its operations, expand its business, or make acquisitions. As a result, investors become part owners of the company and are entitled to a portion of its profits and assets.
Example of Shares
Now that we understand, ‘what are shares?’ Let’s take a look at the example.
Hindustan Unilever wants to raise capital to finance the development of a new product line. The company decided to issue one thousand shares of stock, each priced at Rs.100. Thus, investors who believe in the company’s prospects can purchase these shares, either through a stockbroker (a third-party SEBI-registered professional) or through an online trading platform.
Suppose you bought 100 shares of Hindustan Unilever at Rs. 1000 per share, which means you have Rs. 1 lakh in the company. Thus, as a shareholder, you have a claim on a portion of the company’s assets. The company will typically make payments to shareholders out of its earnings, in the form of dividends. Thus, as a shareholder, you will be entitled to a portion of the company’s profits.
The terms ‘shares’ and ‘stocks’ are used interchangeably., However, for those who are confused about “What are dividends in a stock?”, dividends can be considered as a corporate action where a corporation pays its shareholders out of its profits or retained earnings.
Types of shares available
When it comes to investing in the stock market, several different types of shares are available for purchase. Here’s a brief overview of each type:
- Common Shares: For those wondering what are equity shares, it represents ownership in the company and entitles the shareholder to a portion of its profits and assets. Common shareholders also have voting rights, which allow them to participate in important decisions.
- Preferred Shares: These typically offer a fixed dividend payment, providing a more stable income stream for investors. Preferred shareholders usually have priority over common shareholders when it comes to receiving dividends and getting their money back in the event of a liquidation.
- Treasury Shares: These are issued by the company but then repurchased and held in its own treasury. The company can sell back these shares to the market later if it needs to raise capital. These shares have no voting rights and do not pay dividends
- Voting and Non-Voting Shares: As the name suggests, voting shares give the shareholder the right to vote on important company matters, while non-voting shares do not. Non-voting shares often have lower prices than voting shares since they offer fewer rights and benefits.
- Class A and Class B Shares: Some companies may issue different classes of shares, each with different voting rights or dividend payment structures. For example, Class A may have more voting rights than Class B.
- Growth and Value Shares: These are expected to have high growth rates and earnings potential in the future, while value shares are currently undervalued by the market and may provide good returns in the long term.
Performance Metrics of Share Prices
The financial performance of a company’s shares over time is evaluated using performance metrics of share prices. Here are some of the most common performance metrics of share prices:
- Company performance: The financial performance of a company, including its revenue, earnings, and growth prospects, can have a significant impact on its share price. Positive financial results can drive share prices up, while adverse effects can cause them to fall.
- Industry trends: Economic and market conditions within a particular industry can also affect share prices. For example, changes in interest rates, commodity prices, or regulatory policies can impact the performance of companies.
- Investor sentiment: The perceptions and attitudes of investors can also influence share prices. Positive news or investor sentiment about a company can drive share prices up, while negative news or sentiment can cause them to fall.
Macroeconomic factors: Broader economic conditions, such as inflation, unemployment, and geopolitical events, can also impact share prices. During times of economic growth and stability, share prices rise, but during times of economic instability, share prices fall.
Company-specific events: Events such as mergers and acquisitions, changes in management, or legal disputes can also affect share prices. Negative news can damage investor confidence while positive news can boost them.
How to Buy and Sell Shares
Stockbrokers or online brokerage platforms facilitate the buying and selling of shares. Here are the basic steps that you can follow:
Choose a broker: Select a reputable stockbroker or an online brokerage platform. You will need to create an account and provide personal and financial information to get started.
Research stocks: Research the stocks you are interested in buying. This may include analyzing the company’s financial statements, growth prospects, and industry trends.
- Place an order: Once you have selected a stock, place an order with your broker or online brokerage platform.
Pay: After placing your order, you will need to fund your account. You can do this through a bank transfer, debit card, or other payment methods.
Monitor: Keep an eye on investments and make adjustments based on market conditions or changes in the company’s financial performance.
- Decide to sell: Determine the right time to sell your shares based on market conditions and investment goals.
- Place an order: Place a sell order with your broker or online brokerage platform. You can either place a market order (sell at the current market price) or a limit order (sell at a specific price).
- Receive payment: Once you sell your shares, we will deposit the proceeds into your brokerage account.
Evaluate your investment: Evaluate your investment performance and consider reinvesting the proceeds into other stocks or securities.
Benefits of owning shares
There are several benefits of owning shares, including:
Potential for capital appreciation: Shareholders can benefit from an increase in the stock’s price over time, resulting in capital gains.
Dividend income: Companies may pay out a part of their profits to shareholders in the form of dividends, providing a source of regular income.
Ownership stake: Owning shares provides a small ownership stake in the company, giving shareholders a voice in company decisions.
Diversification: Investing in a range of stocks or doing portfolio investing can provide diversification benefits, reducing overall portfolio risk.
Liquidity: Investors can easily buy and sell shares, which provides them with liquidity and flexibility.
Corporate actions: Shareholders may be eligible to participate in corporate actions, such as stock splits, rights issues, mergers and acquisitions.
Social responsibility: Some investors invest in companies that align with their social or environmental values to advocate for change.
You can mitigate the risks with smallcases!
Investing in shares can provide significant benefits. However, you can also mitigate the risks of investing in shares with smallcase. Let’s understand how.
Market risks: Market risks are related to changes such as economic downturns, geopolitical events, and fluctuations in interest rates. Investors can mitigate these risks by investing in a diversified portfolio or smallcases, even though complete elimination of these risks is not possible.
Company-specific risks: Company-specific risks can include poor management decisions, industry-specific risks, or legal and regulatory issues. Thus, our experts at smallcase execute detailed research of the companies to keep risks at bay.
Liquidity risks: Liquidity risks refer to the possibility of being unable to sell your shares when you want to. Additionally, taking a long-term investment approach and being patient during market volatility periods can help reduce liquidity risks’ impact.
In conclusion, shares are units of ownership in a company representing a claim of its assets and earnings. They are a popular investment option for individuals looking to grow their wealth long-term. Since every investment carries a certain degree of risk, it becomes important to diversify the portfolio by adding different asset classes to your basket of stocks.
So, what are you waiting for? Start your investment journey with smallcase today!