What are Shares?
As defined in section 2 (46) of the Companies Act, 1956, shares represent a shareholder’s interest in a business.
- The total capital of a company is split into small units called shares. A share is the smallest fraction of a company’s total capital.
- Companies issue their shares to the general public through IPO to raise capital that can be used to buy assets, fund new businesses or operations, and invest in growth projects. These listed shares can
- Shares represent the investor’s stake in a business. It is the tradable ownership stake in the share market. Investors own a fraction of a company through their investments in it.
- be traded on the stock exchanges using a trading account and a demat account online. You can invest in unlisted shares also in the over-the-counter (OTC) market, which the SEBI does not regulate, therefore considered risky.
Individuals buy stock investments as they have great potential to provide higher profits. Shares offer investors a part of the company’s profit as dividends equal to that they hold of the company’s capital. Open a demat account online and grab share market opportunities.
Demat Account Meaning:
A DEMAT account is an account with a stockbroker that acts as a repository for your stock market investments. It holds all your shares and other investments electronically, safely under the surveillance of the SEBI. You can open a DEMAT account online with a registered stockbroker.
Types of Shares in India
Besides enclosed ownership rights, shares hold various entitlements like voting rights, priority right to receive dividends, sharing a company’s surplus profits/net losses, etc., depending on its type. Different types of shares are as follows:
- Common shares:
Most companies commonly issue common shares. These are the general equity shares with voting rights concerning the company’s policies or the election of directors. Most common shares carry voting rights and allow shareholders to attend the company’s general and annual meetings. However, these shares can be issued without differential voting rights also, or the company can prescribe a limit to give rights. For example, ten equity shares equal one vote.
Companies offer their net profits to these shareholders as dividends. However, being a partial owner of the company, investors get exposed to the risk of business. Dividend income depends on the company’s profits. It is not a fixed dividend amount, and investors have to bear the company’s losses.
- Preference Shares:
These shares carry preferential rights. Preference shareholders are offered priority to provide dividends over common equity shareholders. Investors of these shares can not avail of voting rights and are non-participating investors.
Preference shareholders receive the guaranteed fixed dividend. Therefore, low-risk investors consider including such shares in their investment portfolios. However, such shareholders cannot participate in the company’s profits beyond their fixed dividends. If a company increases its dividend rate with an increase in the net income, preference shareholders will not be befitted with this increased rate. If investors buy convertible preference shares, they can convert their shares into ordinary equity shares.
- Right Shares:
Right shares are the new shares offered to the company’s existing shareholders at a specific price. These shares hold the right to purchase shares before external investors and are offered to existing shareholders before opening their public trading. For example, if there are 5000 new shares, and an existing shareholder holds 5% of its existing lot, then the company will give 250 shares to the existing investor from the new issue of shares.
- Bonus Shares:
Bonus shares are the converted shares converted from the company’s retained earnings to stocks. The retained profit is the past unpaid profit to the shareholders. Companies offer bonus shares to their existing investors instead of paying dividends. Suppose an investor holds 1000 shares of a company offering 1:10 as a bonus. The investor will get a hundred additional shares without paying the stock price.
- Sweat Equities:
Sweat equities are the rewarding shares issued to exceptional/compensate employees or directors for their contribution to the company. Companies issue these shares with the intention of employee retention.
You can take advantage of such shares to accumulate wealth over time using your demat account. Find a discount broker to open your demat account online to invest at affordable costs.