What Are Shares?
Shares are units of ownership in a company. The terms “shares” and “stocks” are often used interchangeably, but they represent a company differently. While this may seem confusing, it is a matter of how you’re talking about a company and how much ownership you have in it.
For example, say XYZ company issued stock and you purchased 10 shares of it. If each share represents 1% of ownership, you own 10% of the company. The company issued stock, and you bought shares of it.
Another way to think of it is that if you purchase shares of a stock, you don’t buy stock. Stock is a more general term, used to refer to the financial instruments a company issues, while shares are what you actually buy.
KEY TAKEAWAYS
- Shares represent units of ownership in a corporation or financial asset owned by investors who exchange capital in return for these units.
- Common stock shares enable voting rights and possible returns through price appreciation and dividends.
- Preferred stock shares do not offer price appreciation but can be redeemed at an attractive price and offer regular dividends.
- Many companies issue shares, but only the shares of publicly traded companies are found on stock exchanges.
Table of Contents
Understanding Shares
When establishing a corporation, owners may choose to issue stock to raise capital. Companies then divide their stock into shares, which are sold to investors. These investors are generally investment banks or brokers that, in turn, sell the shares to other investors individually or through instruments like a mutual fund or exchange-traded fund.
Shares are the equivalent of ownership in a corporation. Because they represent ownership, not debt, there is no legal obligation for the company to reimburse the shareholders if something happens to the business.
However, some companies may distribute payments to shareholders through dividends. Others may elect not to do so, preferring to put all revenues towards operation, growth, and securing the company’s future.
How Shares Are Issued and Regulated
Generally, a company’s board of directors is given a specific number of shares that can be issued. These are called authorized shares. Issued shares are the number of shares sold to shareholders and counted for ownership purposes. So, a corporation might have 10 million authorized shares but only issue 8 million.
Because shareholders’ ownership is affected by the number of authorized shares, shareholders may vote to limit that number as they see appropriate. When shareholders want to increase the number of authorized shares, they meet to discuss the issue and establish an agreement. When they agree to increase or decrease the number of authorized shares, a formal request is made to the state through filing articles of amendment.
The shares of publicly traded companies are listed on public exchanges, generally through a process called an initial public offering (IPO). This is an expensive, highly regulated, and lengthy process in which a company goes through fund-raising phases and scrutiny by regulators.
Note
Private company shares are generally issued through company stock options or as other incentives to certain employees. These shares are still regulated but usually do not meet the Securities and Exchange Commission’s criteria to be listed on an exchange.
The issue and distribution of shares in public and private markets are regulated by the Securities and Exchange Commission (SEC). Share trading on the secondary market is overseen by the SEC and the Financial Industry Regulatory Authority (FINRA).
Features of shares
Some of the salient features of shares are as follows –
- The value of shares is determined based on the demand and supply in the market. It constantly fluctuates
- Few shares may allot you voting rights
- Shares are perpetual in nature, i.e., they do not have a specific maturity date
Types of Shares
As mentioned, any company can issue shares, but publicly traded companies are more likely to divide their stock into different types of shares.
Common Stock Shares
Many companies issue common stock, which is divided into shares. These are generally called common shares. These provide the purchasers—called shareholders—with a residual claim on the company and its profits, providing potential investment growth through both capital gains and dividends.
Common shares also come with voting rights, giving shareholders more control over the business.
These rights allow the shareholders of a company to vote on specific corporate actions, elect members to the board of directors, and approve issuing new securities or payment of dividends. In addition, common stock can include preemptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
Preferred Stock Shares
Preferred stocks can also be divided into shares, commonly called preferred shares. Compared to common shares, preferred shares typically do not offer much market appreciation in value or voting rights in the corporation. However, this type of stock typically has set payment criteria, like a dividend paid out regularly, making the stock less risky than common stock.
Because preferred stock takes priority over common stock if the business files for bankruptcy and is forced to repay its lenders, preferred shareholders receive payment before common shareholders but after bondholders. This priority treatment reduces the risk even further compared to common shares.
Equity shares
Equity shares are the most common types of shares that are offered by companies. Also called ordinary shares, equity shares form the bulk of the share capital of a company.
Features of equity shares
Common features of equity shares are as follows –
- Equity shares are issued at face value, but they trade at market value.
- A company issues equity shares in the primary market through an IPO (Initial Public Offering). After the shares are subscribed, and the company is listed, the shares trade in the secondary market, which is the stock market.
- Equity shares carry a high level of investment risk.
- Dividend income is a possibility if the company earns profits in a financial year and distributes the same among its shareholders.
Types of equity shares
Equity shares are subdivided into various types based on broad parameters. Let’s understand each of them.
Classification based on share capital
Depending on the share capital that they represent, equity shares can be divided into the following types:
| Types of equity shares | Meaning |
| Authorised share capital | The maximum capital a company can raise by issuing equity shares is called authorised share capital. |
| Issued share capital | Issued share capital is the capital raised by issuing a specific number of equity shares to the public for investment. |
| Subscribed share capital | Subscribed share capital is the part of the capital for which the company has received subscriptions from investors. It is a part of the issued share capital. |
| Paid-up share capital | The portion of the capital for which the investors have invested is called the paid-up share capital. This is a part of the subscribed share capital. |
Classification based on returns
Depending on the type of returns, equity shares can be sub-divided into the following types:
| Types of equity shares | Meaning |
| Dividend shares | Shares that give regular dividends are called dividend shares. |
| Growth shares | If the company reinvests the profits and does not declare dividends, it can use the same for growth. This growth leads to an increase in the market value of shares. Such shares are called growth shares. |
| Value shares | Value shares are those that trade on the market at a discount in comparison to their intrinsic value. |
Other types of equity shares
| Types of equity shares | Meaning |
| Bonus shares | Shares issued to existing shareholders without a cost are called bonus shares. |
| Rights shares | Existing shareholders get the privilege to subscribe to the additional issue of shares through a rights issue. You can buy such shares at a preferential rate within a specified period. |
| Sweat equity | Sweat equity shares are issued to company employees to compensate them for their hard work and efforts. |
| ESOPs | Equity Stock Ownership Plans (ESOPs) are equity shares issued by companies as a part of employee compensation. ESOPs allow employees to buy the company’s shares at reduced rates, hold them through the vesting period and then sell them at a higher rate for earning returns. |
| Voting shares | Shares that earn shareholders the right to vote are called voting shares. |
| Non-voting shares | Shares that do not have voting rights are called non-voting shares. |
Preference shares
Preference shares are also part of the share capital of a company. However, holders of such shares get preference in dividend payments and also at the time of liquidation, hence the name.
Features of preference shares
Some of the salient features of preference shares are as follows –
- Preference shares are not commonly available on the stock exchange for trading
- In some cases, preference shares may promise fixed dividends
- Preference shares generally don’t allow voting rights
- At the time of liquidation, preference shareholders are given first preference
Types of preference shares
Here is a look at some of the different types of preference shares issued by companies –
| Types of preference shares | Meaning |
| Cumulative and non-cumulative preference shares | If there is no dividend declaration in a year, the dividend payment is carried forward to the next year in cumulative preference shares. Non-cumulative shares, however, do not carry forward dividends. |
| Participating and non-participating preference shares | Participating shares are entitled to surplus profits over and above the dividend declared. Non-participating shares do not receive any surplus profit. |
| Convertible and non-convertible preference shares | Shares that can be converted to equity shares (after specified conditions are met) are called convertible preference shares. Non-convertible shares cannot be converted to equity shares. |
| Redeemable and irredeemable preference shares | Redeemable shares have a fixed tenure, after which the company buys back such shares at a predefined price. Non-redeemable shares continue in perpetuity. |
Why does a company issue shares?
Companies issue shares primarily to raise capital for their operations, growth, and expansion. Companies can also issue equity shares for the following reasons –
- To raise capital for various operations
- To get listed in the share market
- To gain visibility
- To expand their market reach
Stock vs share: Key differences
Here are some important points of difference between stock and share:
- Definition: ‘Stock’ represents the holder’s part-ownership in one or several companies, while ‘share’ refers to a single unit of ownership in a company. For example, if X invests in stocks, it means that X has a portfolio of shares across different companies. But if X invests in shares, the key questions are ‘shares of which company’ or ‘how many shares.’
- Ownership: When an individual owns shares of several companies, you can say they own stocks. But if someone bought shares of a specific company, they only own shares.
- Denomination: Individuals who own stocks have the option to choose different stocks of different values. Those who own shares in a specific company can, of course, own multiple shares. But the shares will only be of the same or equal value.
- Paid-up value: Stocks are always fully paid-up in nature. However, shares could be either partly or fully paid up.
- Nominal value: This value is assigned to each share when the stock is issued. It is different from the market value, which varies based on demand for and supply of the shares.
- Kind of investment: Shares can refer to a large group of financial instruments known as securities. They can include mutual funds, exchange-traded funds (ETFs), limited partnerships, real estate investment trusts, etc. But stocks mainly refer to corporate equities and securities traded on a stock exchange.
Types of stock
There are mainly two kinds of stocks: common stock and preferred stock.
- Common stock: Common stock investors can vote at shareholders’ meetings. They also have a more directive stake in the company and receive company dividends regularly.
- Preferred stock: Preferred stockholders are not given voting rights. However, they receive dividend payments ahead of common stockholders. Investors in this category are given more priority over common stockholders if the company goes bankrupt.
Both common and preferred stocks fall under the following categories:
- Growth stocks: Stocks of this category grow and earn faster than the usual market average. As they rarely offer dividends, capital appreciation is what investors hope for. A start-up tech company may offer this type of stock.
- Income stocks: These stocks pay dividends consistently and help an investor to generate regular income. An established utility company’s stocks would be an example of income stocks.
- Value stocks: These usually have a low price-to-earnings (PE) ratio. So, they are much cheaper than those with a higher PE ratio. They could be either growth or income stocks. People buying value stocks expect the stock price to rebound soon.
- Blue-chip stocks: These are the shares of big, well-known companies with a solid growth history. Such stocks generally pay dividends. Blue-chip stocks are common among investors due to the reliability of the company. In addition, stocks can further be categorised by their market capitalisation and size. There are large-cap, mid-cap, and small-cap stocks. While shares of small companies are called microcap stocks, low-priced stocks are known as penny stocks.
Benefits and risks
For someone with a long-term goal, investing in stocks is a great way to get capital appreciation. Young investors saving for the long haul can get positive returns by investing in stocks.
However, stock prices can plunge as well. Besides, there is no assurance that the company stocks you hold will grow and perform well. That is why it is important to factor in the potential risk before investing. And only invest what you can afford to lose.
The stock price of a company may fluctuate multiple times a day. Market fluctuations could be a factor when investing in stocks. In addition, the stock price can take a hit for various reasons including, internal and external factors like global, political or economic issues.
If you sell your shares below the price you paid, you will lose money. But if you hold on until the price goes up, you could pocket a nifty profit.
Example of stock price fluctuation
Suppose you buy 100 shares of XYZ Ltd at ₹85 (100 x 85= ₹8,500) in the past week. The very next day, the stock price declined to ₹75. As a result, the total value of your shares stands at ₹7,500 (100 x 75) against the past value of ₹8,500. If you were to sell the shares, your total loss would be ₹1,000. But a week later, the stock price crosses your purchase price and stands at ₹90. This brings the total value of your shares to ₹9,000 (100 x 90). If you sold the shares now, you would pocket an overall profit of ₹500.
How do people make money in stocks?
It is well known that stocks are riskier than any other fixed investments. But they also carry the possibility of fetching the maximum returns. If you have already invested in stocks, you can earn in two ways:
- Selling shares: You will need to sell the shares for more than what you paid. The price difference would be your profit.
- Dividend earnings: Companies send regular payments to their shareholders in the form of dividends. Though not all stocks offer dividends, those that do usually pay every quarter.
Can You Buy One Share of Stock?
Yes, you can buy one share of stock. One share is typically the minimum number of shares you can buy. You can of course buy more, but if you want to purchase only one, you are able to do so.
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What’s the Difference Between a Share and a Stock?
A stock is an equity instrument issued by a corporation that represents ownership of that company. A share is one unit of that ownership. You would say “I own 10 shares of Apple stock” for example.
Do Shares Make You Money?
Common shares can make money through capital gains or buybacks. Preferred shares can make money for you through dividends or higher buyback prices.
The Bottom Line
Shares are units of stocks issued by a corporation that represent ownership. They are sold to investors and traders to raise capital for the company. Many businesses issue stocks and shares when they need funds for research and development, expansion, or other growth opportunities.
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