What are Shares: Understanding Stock Ownership

Favourable economic conditions, greater focus on wealth creation among millennials, and rising awareness about the long-term benefits of investing. All these factors have boosted retail participation in the Indian bourses.

So much that new demat accounts hit a record-high 3 million in July 2023. Thanks to the upbeat market sentiment, India now houses an all-time high of 123.50 million demat account holders.  

Over the past few months, the stock market has dominated morning news stories. Some of the world’s prominent investors have been singing praises about investment in stocks. Betting wisely on stocks of valuable or fundamentally strong companies helps you build long-term wealth and meet financial goals. If these facts and figures have convinced you enough to wonder “what is share,” here is a guide to help you.

What is Share?

A share is a unit representing partial ownership in a company. When a public organisation wants to raise capital, it can sell its shares to investors, who then become the equity shareholders in the business.

The company can use the capital generated to expand its business, find its operations, and perform mergers & acquisitions (M&A). At the same time, shareholders are entitled to a fraction of the organization’s assets.

Types of Shares

Shares contain two primary categories – equity and preference.

What is Equity Share?

Equity shares are the most popular types of shares that companies offer. Also called ordinary or common shares, they are transferable and are actively traded on stock exchanges. As an equity shareholder, you have the right to get dividends as well as voting rights on distinguishing corporate matters.

That said, these payouts are not fixed; they depend on the company’s business performance in a particular financial quarter.

Equity shares are further split based on share capital, definition, and returns.

What is Share Capital?

Share capital is the money organisations generate by issuing equity shares to the general public via initial public offerings (IPO). It consists of:

• Authorized share capital: The maximum volume of equity shares a company can issue in its Memorandum of Association (MoA).  
  
• Issued share capital: Capital that a company generates by issuing a specific volume of equity shares. It cannot exceed the company’s authorized share capital.
  
• Subscribed share capital: Portion of the issued share capital that investors have agreed to subscribe to. Issued and subscribed share capital become the same if investors subscribe to all equity shares of a company.

• Paid-up share capital: Amount of money investors actually pay for a company’s shares. If investors pay the entire amount they have subscribed, the paid-up and subscribed share capital become identical.

Classification Based on Definition

• Bonus shares: Additional shares a company puts on sale for existing investors as a bonus for free.
  
• Sweat equity shares: Shares a company offers to its Board of Directors or employees at a lesser price to reward them for their hard work and efforts.
  
• Rights shares: Existing investors can buy a company’s rights shares at a predetermined price and timeframe before they get available for trade on the bourses.

• Voting and non-voting shares: As the names suggest, companies issue these shares to offer investors zero or differential voting rights.

Classification Based on Returns

• Dividend shares: Distribute regular dividends to investors that are part of a company’s earnings.
  
• Value shares: Available for trade in the stock market at a discount than their fair value.

• Growth shares: Experience considerable price growth, leading to better returns on investments (ROI). As companies reallocate their profits in these shares, they may/may not distribute dividends to their investors.

What is Preference Share?

Like equity shares, preference shares also represent part-ownership of a company but with a slight advantage – shareholders enjoy priority over equity shareholders in dividend payments and getting money during a company’s liquidation.

Preference shares contain the following categories:

• Cumulative and non-cumulative preference shares: Within cumulative preference shares, the dividend payment is carried forward to the subsequent year if the company does not declare dividend distribution in a particular year. On the contrary, non-cumulative preference shares do not offer unpaid dividend advantages.
  
• Participating and non-participating preference shares: Participating shareholders have a claim on surplus profits on top of the company’s dividend distribution. Non-participating shareholders do not get to enjoy such benefits.
  
• Convertible and non-convertible preference shares: Convertible preference shares are convertible into equity shares after meeting the requirements of the firm’s Article of Association (AoA). Non-convertible shares, however, have no such advantages.
  
• Redeemable and irredeemable preference shares: After a fixed timeframe, companies claim redeemable preference shares at a predefined price. These shares have no maturity date. Non-redeemable shares, on the other hand, have no such restrictions.

Recently, Larsen & Toubro (L&T) announced a share buyback of up to ₹10,000 crores. Similarly, Wipro recently wrapped up its ₹16,000 crore share buyback. But what is share buyback, and why do organizations execute it?

Share Buyback

Share buybacks are a corporate action where publicly traded companies can repurchase their outstanding shares either directly (tender offer) or from a secondary market. In such a situation, the price of each share is more than its current market value.

Share buybacks offer multiple benefits. Firstly, boardroom members can consolidate their hold on their company (promoter holding). Secondly, stock buybacks are subjected only to dividend distribution tax (DDT), unlike dividends, which are taxed at three different levels. Lastly, reduced outstanding shares in the open market boost the earnings per share (EPS).

Empowering Your Financial Journey

Shares are a popular investment option for people looking to build their wealth long-term. Gaining a solid grip on the stock market and ownership basics is like having a compass that guides you through the complex landscape of investing.

So, with the foundational knowledge presented in this article, enter the stock market realm with confidence and purpose, ready to grab the potential it holds while evaluating the risks that come along.

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