Share Definition

The stock market has been the morning news for the past few months. The most common strategy for achieving long-term wealth and financial objectives is stock investing. In India alone, retail investors increased by a staggering 142 lac in FY21. Currently, stocks or equities make up 12.9% of all investments made in India. One must have a fundamental understanding of the components and operation of the stock market in order to be an investor.

What is the meaning of share?

A share represents an equity ownership interest in a company. The shareholders are entitled to dividends from whatever profits the company generates. They also take the biggest hit from whatever losses the company might suffer. Simply put, if you own shares in a corporation, you have a stake in the company that issued the shares equivalent to the amount of shares you have bought.

Equity and preferred stock shares

Their profitability, voting rights, and handling during a liquidation all differ from one another. The vast majority of shares that a company issues are what are known as ordinary shares. Investors frequently trade equity shares on stock exchanges and are able to transfer them. In addition to having the power to vote on corporate matters, equity shareholders also have the right to dividend payments. However, these payouts are not constant. Equity investors share in any losses incurred by the business up to the amount they invested. Dividends on equity shares can be made based on:

• Share capital
• Definition
• Returns

Classification Of equity shares based on share capital

The classification of equity shares according to share capital is given below:

• Authorised share capital: In its Memorandum of Associations, each firm must state the maximum amount of capital that may be raised through the issuance of equity shares. However, the cap may be raised by completing specific legal processes and paying additional fees.
• Issued share capital: This phrase refers to the portion of the company's capital that has been made accessible to investors through the issuance of equity shares. For instance, the issued share capital will be Rs 40 lakh if a company issues 20,000 equity shares with a nominal value of Rs 200 each.
• Subscribed share capital: Investors who have subscribed for shares of the company's issued capital are considered to have subscribed share capital.
• Paid-up capital: Paid-Up Capital is the amount of cash investors spend to own shares of a corporation. Due to investors paying the entire amount at once, the words "subscribed capital" and "paid-up capital" refer to the same sum.
• Equity shares: Equity shares are also known as ordinary shares. They are among the most common stock types. These shares are formal agreements that provide stockholders ownership stakes in the company. Equity investors are most at danger. These shares' owners have the right to cast ballots on a range of business-related topics. Equity shares are also transferrable and offer a profit-based dividend. It should be highlighted that equity stockholders are not entitled to a fixed dividend. An stock shareholder's liability is capped at the value of their investment. However, owning does not grant any preferential rights. Equity shares are divided into different categories based on the form of share capital.

Definition-based classification of equity shares:

Look at this method for classifying equity shares.:

• Bonus shares: The definition of a bonus share refers to any additional shares that are given as a gift or bonus to current shareholders.
• Rights shares: A corporation can issue new shares to its current owners at a predetermined price and within a specific timeframe before making them available for trading on stock markets.
• Sweat equity shares: If you have made significant contributions to the business while working there, the management may decide to compensate you by issuing sweat equity shares.
• Voting and non-voting shares: Although the majority of shares have voting privileges, the business may issue shareholders with shares that have differential or no voting privileges.
• Cumulative and non-cumulative preference shares: When a company doesn't pay dividends for a certain year, cumulative preference shares are carried over and accumulated. These accumulated dividends are paid first when the business experiences future financial success. If there are no future earnings, no dividends are paid because dividends for non-cumulative preference shares do not accumulate.
• Participating and non-participating preference shares: After dividends have been paid to equity owners, participating shareholders are entitled to a portion of any earnings that are still available. In years when the company has generated more earnings, these stockholders are consequently qualified to receive dividends in addition to the fixed payout. Holders of non-participating preference shares are not entitled to any gains following the distribution of dividends to equity owners. Holders o f non-participating preference shares are not entitled to any earnings after the equity shareholders have been paid. Therefore, if a corporation has any excess profit, they won't receive any further dividends. Only their annual set dividend share will be paid to them.

Classification of equity shares based on returns

Here are some share categories based on returns:

• Dividend shares: A business may elect to prorate the issuance of new shares in order to pay dividends.
• Growth shares: These kinds of shares are linked to businesses that experience rapid growth. While such businesses might not pay dividends, the value of their stocks rises quickly, giving investors financial gains.
• Value shares: These shares are traded at a discount to their actual value on stock exchanges. Over time, investors can anticipate price increases that will result in higher share values.

Valuation

A share is worth what a transaction would probably cost if it were to be made to sell it, according to the underlying principle. In different markets, shares are valued using different standards. The liquidity of the market greatly influences whether a share can be sold at any given moment. The most accurate first market indicator of the "real worth" of shares at a given point in time is typically thought to be an actual selling transaction of shares between buyer and seller. A minority discount is often applied when valuing a minority shareholding (less than 50%), as ownership of the shares confers limited control over the company if it is controlled by a majority shareholder.

Terminology

The term "outstanding shares" refers to securities that have been authorised by the government, issued by the company, and are held by third parties. The number of outstanding shares times the share price results in the market capitalisation of the company. This sum would be sufficient to purchase the company if the trade price remained unchanged.

Issued shares is the sum of all issued and treasury shares; authorised shares is the combination of issued (by the board of directors or shareholders) and unissued but authorised by the company's charter documents; and treasury shares is the number of shares that the corporation itself has authorised, issued, and is holding.

Tax treatment

Dividends are taxed differently in different tax jurisdictions. For instance, in India, shareholders get tax-free dividends up to INR 1 million, but the firm is still required to pay 12.5% in dividend distribution tax. The idea of a deemed dividend, which is taxed, is another. Additionally, restrictions are included in Indian tax legislation to prevent dividend stripping.

Share certificates

Share certificates were traditionally presented to investors as proof of their ownership of shares. In the present day, ownership may be registered electronically via a system like CREST or DTCC, a central securities repository, instead of constantly being given certificates.

Benefits and risks

Stock investing is a terrific technique to obtain capital growth for someone with a long-term goal. Young investors who are putting money down over the long term can benefit from investing in stocks. Stock prices, however, have the potential to fall. Furthermore, there is no guarantee that the firm stocks you own will perform well and increase. Because of this, it's crucial to consider the risk before making an investment. And never risk more than you can afford to lose when investing. A company's stock price may change several times per day. Investing in equities could be affected by market swings. Additionally, there are a number of internal and external factors, such as global, political, or economic ones, that could affect the stock price. Losses result if shares are sold for less than what was paid for them. However, if you wait until the price increases, you might be able to make a tidy profit.

Example of stock price fluctuation

Assume you recently purchased 100 shares of XYZ Ltd. For Rs 85 (100*85=Rs 8,500). The stock price drops to Rs 75 the very following day. Currently, the total value of your shares is Rs. 7,500 (100*75), down from a previous value of Rs. 8,500. Your total loss if you sold the shares would be Rs 1,000. The stock price crosses your buy price and is now Rs 90 a week later, nonetheless. Your shares now have a total value of Rs 9,000 (100*90). You would make a total profit of Rs 500 if you sold the shares then.