The share market makes headlines every morning. Investments in shares have emerged as the most popular medium of generating long-term wealth and fulfilling financial goals. The Indian share market has been the eye candy for foreign investors throughout 2023, causing NIFTY Nifty and Sensex to reach their all-time highs. If you plan to invest in shares and gain profits from them, here is a complete guide to understanding the meaning of shares are, it’s types, features, reasons to invest in them, and how to invest.
What are Shares?
Simply defined, a share is the unit of ownership in a company. When owners establish a corporation, they issue stocks to raise capital if required. The company divides the stocks into shares, which they sell to investors.
Each share represents ownership in a company, entailing a stake rather than debt. Shareholders earn a portion of profits in proportion to their investment. Yet, should the company falter, shareholders bear the loss, as their ownership implies responsibility. While shareholders enjoy company ownership privileges, such as voting rights, dividends, and potential appreciation, they also bear the brunt of any financial setbacks, as the company is not obligated to indemnify them.
Investing in shares gives investors an opportunity for capital appreciation in the long term. Besides that, you can generate income through dividends that the company pays out to its shareholders. Simultaneously, you can quickly liquidate the shares if you need money or want to sell the shares. If you buy a large share of the company, you also get voting rights in the company’s strategic business decisions. The key is to know your investment goals, invest according to your risk appetite, decide your investment strategy, time the market, do the trade, and monitor your portfolio to generate maximum returns.
Types of Shares
A company may issue different types of shares, each with its unique perks and limitations. The different types of shares you may consider investing in include the following:
These are the most common share types carrying voting rights. However, they do not give the investors any right to demand or receive dividends. The ordinary shares’ dividends are also less than those with preference shares. A company may divide its common shares into classes with various rights attached to them.
These shares confer limited preferential rights to the holders, making them superior options to ordinary shares. Usually, the preferential rights are related to fixed dividends. The issuing company prioritizes dividends and capital returns to preference shareholders over ordinary shareholders.
These shares allow principal share capital repayment to shareholders. The issuing company may redeem them at a predetermined value on a particular date or at their directors’ discretion. However, it happens on the condition that the issuer is a going concern. The company may pay out any redemptions from its capital using proceeds from newly issued shares.
These shares carry rights to fixed dividends for particular terms. At the term end, the company may leave them as they are or convert them into ordinary shares. The company’s agreement must specify the conversion charges, if applicable. When the ordinary share’s price increases, the conversion prices will remain the same. As a result, shareholders can purchase ordinary shares at a lower price.
Treasury shares, also known as treasury stock or re-acquired shares, refer to shares of a company’s own stock that it has repurchased from existing shareholders and holds in its own treasury. These repurchased shares become part of the company’s assets, and they no longer represent ownership in the company as external investors no longer hold them.
Growth shares are the most exciting types of shares in the market, but earning high returns with them is not so simple. Investing in a high-growth company can be extremely rewarding, but their high prices make them unaffordable for most retail investors. If you can purchase a growth share at an affordable price, you can earn good returns for several years to come.
Unlike growth shares that are often over-valued, value shares are under-valued with lower valuation and restricted growth rates. You can find many undervalued stocks and earn good returns by investing in them for an extended time period.
Features of Shares
A company divides its total value into smaller units of denominations called shares. Simply put, shares are units that measure its shareholders’ financial interest. It gives certain rights to the shareholder, a share of the company’s profits throughout its life. Some features of shares you must be aware of include the following:
Each share has a face value. The market value of a share may be less or more than its face value.
A company may issue a share exactly as its face value, more than its face value, or less than its face value. The value at which it is issued is called its issue value.
Paid Up Value
A share can be paid up partly or fully. If the share calls are not paid in time, the company has the right to forfeit the shares with part payments.
The investors who own the shares are called the shareholders. The shareholders own a part of the company according to the share they purchase.
Proof of Title
When investors buy a share, they receive a share certificate under the company’s common seal in case of offline share purchase. This certificate is the buyer’s proof of title.
Share buyers receive certain rights with their purchase, such as the right to vote in a company meeting, receive dividends, and inspect financial statements.
Owners can freely transfer a company’s shares to other individuals.
Shareholders receive dividends and stock appreciation as their return on investment. However, they are not fixed and depend on the company.
How are Shares Regulated?
Company owners bring IPO and issue shares to secure capital for growth and other purposes. In the realm of regulation, the Securities and Exchange Board of India (SEBI) play a pivotal role in the Indian share market. Since 1992, SEBI has spearheaded safeguarding investor interests and fostering market progress. Complementing this effort, the Reserve Bank of India deploys policies, oversees regulations, and upholds investment stability. These entities harmonise capital formation through synchronised collaboration, driving the nation’s economic advancement. These include the following:
The stock market plays a crucial role in issuing and regulating shares. It provides a platform for companies to issue shares, raising capital for expansion. Regulatory bodies like SEBI oversee transparency, ensuring fair trading practices. Investors access opportunities, while regulations maintain market integrity, fostering investor confidence.
India has two stock exchanges: NSE (National Stock Exchange of India), trading since 1994, and BSE (Bombay Stock Exchange), trading since 1875. They drive the Indian economy, making the Indian stock market more attractive to investors.
Nifty and Sensex are the two main indices in the Indian stock exchange. Sensex has a weighted average of market capitalisation for thirty financially strong and reputable companies across various sectors. Nifty is the flagship index of the NSE used to measure the Indian stock market’s performance.
Established in 1992 as an independent authority, SEBI is the main regulatory body that oversees the Indian stock exchange. It has the right to enforce penalties and fines in the case of rule violations. Besides, the body also promotes the training and education of intermediaries involved in the share market.
RBI, the central bank of India, formulates and implements monetary policies to measure liquidity conditions and interest rates. These policies largely affect the overall share market liquidity and the cost of borrowing. Moreover, the RBI also oversees the settlement and payment systems in the share market, ensuring a safe mechanism to clear and settle transactions.
SEBI and RBI also work together to regulate foreign investments in the share market and monitor capital flow, portfolio investments, and FDI limits.
Preference shares are those that companies prioritize over other equity shares regarding dividend payments. Preference shareholders holding these shares are the first to receive dividends when the company pays interest to its investors. These shareholders can also claim capital repayment if the company fails to perform expectedly.
Some notable features of preference shares are as follows:
Preferential option of dividend payment to shareholders
No right to vote
Right to claim assets when the company winds up
Fixed dividend payouts to shareholders, irrespective of the earned profits
Source of hybrid financing
Preference shares are highly flexible. They can be convertible, perpetual, exchangeable, or cumulative. Beyond priority during dividend payments, preference shareholders have several other advantages when they buy preference shares. They are a great way to future-proof your investments, helping you reap their benefits. For instance, if the ordinary shares perform extraordinarily well, shareholders can easily convert them into standard shares to benefit from the situation.
One great feature of preference shares is that investors have the right to repurchase their shares whenever they like. Preference shareholders have a significantly more secure position when a company liquidates, as they are have the first right over the company’s assets. Therefore, they are wise options to earn priority in a company’s shareholding position.
Why Invest in Shares?
An increasing number of people are turning towards investment in shares because they are a good way to beat inflation. Investment in the share market provides several benefits, including high returns, portfolio diversification, risk reduction, long-term goals achievement, and wealth building over time. Below are a few reasons to invest in shares:
High Returns on Investment
One of the primary reasons to invest in the stock market is to earn good returns on your investment. As the value of your shares increases, your returns will also increase and build your corpus. The returns are higher than other investment options like Fixed Deposits and savings accounts. Since these give you a company’s partial ownership, you can have a stake if the business succeeds.
Another reason to invest in shares is to build wealth over time. By investing in shares, the value of your portfolio increases, and you save big with greater financial security. Hence, they are a good source for fulfilling goals like education, retirement, home purchase, etc.
You may invest in shares to diversify your investment portfolio. Since they can be different types of shares like value stocks, growth stocks, and dividend-paying stocks, they reduce the risk with diversification and unlock the growth potential. Portfolio diversification also reduces the associated risks, increasing the chances of achieving good returns overall.
Liquidity is another important reason to invest in shares. These investment instruments are highly liquid, making them easy to purchase and sell. Comparatively, other assets like real estate are less liquid and take much longer to buy and sell.
You may start investing in small amounts and gradually build the portfolio with time. Initial investments in small and mid-cap companies are a good way to start. These companies have more growth potential to provide better returns. Moreover, you can choose to invest in your preferred stocks according to your affordability, risk appetite, and growth expectations.
How to Buy Shares?
The process of buying shares is a simple and hassle-free process online. First, you will need a PAN Card containing a unique 10-digit alpha-numeric number provided by the Indian government. The next step is to open a Demat Account. An online account stores your purchased shares online in dematerialised form. The paper-based shares that people held earlier were prone to the risk of loss, damage, and theft. Finally, you will need a trading account to buy or sell shares in the stock market.
Once everything is in order, register with a brokerage platform authorised by the SEBI. It will facilitate share trading from your Demat and trading account. When you purchase a share online, you will use your trading account to trade stocks, pay for the purchase from your bank account and store the purchased share in your Demat account. If you adhere to all the steps mentioned above, you can log in to your Demat and trading account and compare shares to purchase the best one according to your goals.
Before You Go..
In the dynamic landscape of wealth generation, shares emerge as a potent vehicle for financial growth. This guide unraveled the essence of shares, their types, and their pivotal role in building portfolios. From high returns and portfolio diversification to wealth building and liquidity, investing in shares unlocks an array of advantages. With a step-by-step buying process, embark on a journey of informed investment and the possibility of a prosperous financial future.