What Is a Share in the Stock Market? Types and Their Importance
A share is known as a unit of ownership in a company. When you buy shares, you are actually buying a stake in the business and becoming a part-owner. Shares are kept electronically in your Demat account and can be traded efficiently in the stock market through brokers or websites. This makes it one of the easiest ways for individuals to participate in the success and growth of firms.
Why Are Shares Important To Investors?
- Ownership: Shares give you ownership rights and make you a partner in the company’s journey.
- Dividends: Some businesses distribute a percentage of their profits as dividends, giving a consistent source of income..
- Growth Potential: If the company performs well and grows, the share price increases, which means you get capital gains.
- Liquidity: The stocks can be liquidated at any point within trading time, providing investors with flexibility.
- Influence: Equity shareholders also enjoy voting rights, allowing them to have a say in major decisions.
For these reasons, shares are a popular choice for both short-term traders and long-term investors who want exposure through equity trading or even margin-based strategies like MTF (Margin Trading Facility).
Types of Shares In The Share Market
| Type | Meaning |
|---|---|
| Equity Shares | Ordinary shares give ownership rights, voting power, and potential capital gains. |
| Preference Shares | Shares with fixed dividend rights and repayment priority over equity shareholders. |
Both types serve different purposes. Equity shares are for those who want long-term growth and decision-making power, while preference shares suit investors who prefer stable returns.
Equity Shares (Ordinary/Common)
Equity shares are the most commonly issued shares by companies. Investors purchasing these shares acquire ownership of the company and obtain voting rights. They have the authority to decide matters such as the election of directors and approval of dividends.
Dividends on equity shares are not assured. Shareholders can receive dividends if the company is profitable; otherwise, nothing is paid. Although equity shareholders bear greater risk during adverse times, they reap greater benefits when the company expands, as share prices appreciate substantially. Equity shares are most appropriate for those investors who look for long-term wealth generation through equity trading.
Preference Shares
Preference shares are a safer alternative to equity shares, offering a fixed dividend and repayment priority in case the company winds up. However, preference shareholders typically do not get voting rights.
Types of preference shares include:
- Cumulative: Accumulates unpaid dividends that must be cleared before equity shareholders are paid.
- Non-cumulative: Missed dividends are not carried forward.
- Participating: Gives additional dividend benefits in profitable years.
- Non-participating: Only fixed dividends are given.
- Convertible: Can be converted into equity shares later
- Non-convertible: Cannot be converted into equity shares.
This makes preference shares attractive for conservative investors who value security and predictable returns.
How Do Primary And Secondary Share Markets Work?
- Primary Market: Here, companies raise money by issuing new shares through Initial Public Offerings (IPO). Investors buy directly from the company, and the funds raised help expand business operations.
- Secondary Market: Once listed, shares are traded among investors on exchanges like NSE or BSE. The company doesn’t get funds here; instead, investors trade at current market prices.
Together, these markets ensure smooth fundraising for companies and liquidity for investors.
How To Buy Shares In India (Demat, Trading Account Steps)
- Visit Findoc’s Website.
- Open a Demat account to keep your shares in electronic format.
- Open a trading account to place buy or sell orders in the market.
- Link your bank account for easy transfer of funds.
- Research companies before investing.
- Issue a buy order through your broker’s app or platform.
- Get shares directly credited to your Demat account after settlement of the trade.
This makes investing in shares safe and transparent for all investors.
What Factors Affect Share Price Movement?
Several factors influence how share prices move:
- Company Performance: High profits generally push share prices up, while poor results bring them down.
- Demand and Supply: As more individuals wish to purchase a share, its price increases; as more sell shares, the price decreases.
- Economic Conditions: Inflation, interest rates, and policies all influence stock prices directly
- Global Events: Pandemics, natural disasters, or geopolitical tensions can lead to volatility.
- Investor Sentiment: Positive news brings buying interest, whereas negative news results in selling pressure.
By comprehending these factors, investors can better time their entry and exit.
Difference Of Issued, Authorised, Subscribed & Outstanding Shares
| Type | Meaning |
|---|---|
| Authorised Shares | The maximum number of shares a company is allowed to issue legally. |
| Issued Shares | Portion of authorised shares that the company has actually released to investors. |
| Subscribed Shares | Shares from the issued pool that investors have agreed to buy. |
| Outstanding Shares | Shares currently held by shareholders, excluding those bought back by the company. |
These terms explain the different stages of share issuance and ownership in a company.
What Are The Risks Of Investing In Shares?
- Market Risk: Prices of stocks can rise or fall rapidly, leading to losses.
- Business Risk: Bad sales, poor management, or increased costs can damage share value.
- Liquidity Risk: Certain shares do not have sufficient buyers, so they are difficult to sell quickly.
- Economic Risk: Recessions, government actions, or worldwide problems can influence returns.
For instance, if a business is bankrupt, preference stockholders and creditors are given precedence, while equity shareholders are at the tail end. This risks equity investment but also rewards in the long term.
Conclusion
Shares give investors a way to participate in the growth of companies and earn returns through dividends and price appreciation. By learning about share types, risks, and market mechanisms, you can make smarter financial decisions. Whether you want to invest in IPO, trade actively through equity trading, or use margin with MTF, starting your investment journey with Findoc ensures a safe and seamless trading experience.
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Frequently Asked Questions
A share is a small part of a company that you can own. When you buy a share, you become a part-owner of the company and can benefit from its profits and growth.
The four popular categories of shares are equity shares, preference shares, bonus shares, and rights shares. Each of them has different advantages, including ownership rights, fixed return, or free/additional shares provided by the firm to current shareholders.
Preference shares give investors a fixed dividend and priority repayment in case the business closes down. They usually do not offer voting rights, but are safer than equity shares. Therefore, they are ideal for conservative investors who want to get constant returns.
Owning shares can help you grow wealth over time through rising prices and dividends. They provide liquidity since you can sell anytime, and also give ownership rights, sometimes with voting power in the company’s major decisions.