What are stocks/shares?
‘Stock/Shares’ is the term that is used to describe a share in the ownership of a company. Each share is worth a certain amount based on the overall worth of the company. When you buy shares of a certain company, it essentially represents your ownership of a small portion of a public corporation.
Let’s understand this with an example:
Mr. A wants to start a factory. But for that, he needs to invest Rs 10 lakh. However, he has only Rs 2 lakh with him. He asks 4 of his friends to invest the remaining money. In return, he gives them each 20% of the company’s/factory's ownership.
Mr. A's business is performing exceedingly well after five years. His factory is now valued at Rs 50 lakh. That means the value of Mr. A and his friends investment has increased five times.
Similarly, you can buy shares in a public company and become a part-owner of the company. When the value of the company rises, the value of your investment rises too.
Listed companies sell shares in order to obtain the necessary funds for the company to grow.
This is first done through a process called an Initial Public Offering (IPO). After the IPO, shares are sold and bought by investors on a platform known as a stock exchange.
Stocks basics: How do you buy and sell shares?
In the simplest sense, the stock market resembles every other market in the world. People come here (not physically) to make money. This is done by buying and selling shares of different companies.
For instance, imagine P buys 200 shares of company X at Rs 10 per share. This means that P has invested Rs 2,000 in company X.
After six months, the price of each share increases to Rs 20/share. The value of P's investment at this point is Rs 4,000.
Now, if P sells his/her shares at this point, he/she would earn a neat profit of Rs 2,000.
Buy low and sell high. That’s considered to be one of the fundamental principles of making money in the stock market.
What are the Types of Shares?
Broadly there are two types of shares – equity and preferred. Equity shares, also known as ordinary shares, represent ownership stake in a company. Thus, as an equity shareholder, you hold fractional ownership in a company.
As an equity shareholder, you benefit from the company’s profit and with a significant holding you can have a say in the company’s management. However, there are certain downsides to equity shares as well. Cost of issue of such share is high, and their returns keep fluctuating.
Preferred shares, like equity shares, also represent ownership in a company. If you are a preferred shareholder and the company decides to distribute dividends, you will get preference over equity shareholders. In other words, dividends will be first paid to you and then to other shareholders.
This is one of its major advantages. However, as a preferred shareholder you don’t get voting rights as equity shareholders do.
How Shares Work?
Companies sell shares to raise capital for their business. They issue shares through initial public offering in the primary market, which are then traded in the secondary market. If you decide to buy a share, you do so from another investor. Similarly, if you wish to sell a share, you need to sell it to a potential buyer.
The entire trade of buying and selling shares are handled through stock exchanges, with a broker representing each investor.
Why Invest in Shares?
Investing in shares gives you the chance for long-term capital appreciation. Also, you can earn profits through dividends paid out by the company. At the same time, shares can be quickly liquidated, should you want to sell them.
If you are a large shareholder of a company, the same gives you voting rights and have your say in strategic decisions of businesses.
Conclusion
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