You must realise that you may invest in a number of stock market products in order to take the proper steps toward becoming a seasoned investor. Shares, derivatives, mutual funds, and bonds are examples of these. The stock/equity market, for example, has roughly 18 million investors. In India, stocks or equities account for about 12.9 percent of total investments.
What are shares and how they differ from stocks?
When a company needs money to develop its business or meet operational needs, it has two options: borrow money or issue stocks that give investors a piece of the firm. The lowest denomination of a company’s stock is a share, which represents a percentage of the company’s ownership.
The capital of a firm is broken down into small, equal pieces of a finite number. A share is the name given to each unit. A share is a proportion of ownership in a corporation or a financial asset in basic words. Shareholders are individuals who possess shares in a corporation.
For instance, if a company’s market capitalization is Rs 10 lakh and each share is valued at Rs 10, the total number of shares to be issued is 1 lakh.
TYPES OF SHARES
There are two types of shares: equity and preferential. Both have sub-categories of their own. If you’re ready to begin your stock market investment adventure, you need to know the basics. Let’s understand the different sorts of shares.
This sort of share, as the name implies, provides certain preferred privileges over other types of shares. The following are the key advantages that preference shareholders enjoy:
- They are given first priority when it comes to receiving dividends, which represent a portion of the company’s profits.
- Preference shareholders have first claim to remuneration if the firm goes bankrupt.
- In addition, preference shares are divided into three categories:
- Cumulative Preference Shares
Before any dividend is paid to equity owners, cumulative stockholders have the right to obtain dividend arrears. For example, if dividends on preference shares were not paid in 2017 and 2018 owing to market downturns, preferred owners are entitled to dividends for all previous years in addition to the current one.
- Non-Cumulative Preference shares
Any outstanding dividends are not available to non-cumulative stockholders. Only when the firm makes a profit do these stockholders receive a dividend. For the previous years, no dividends were given.
- Convertible preference shares
These shares are convertible, as the name implies. Convertible shareholders have the option to convert their preference shares into equity shares at a later date. The conversion of shares, however, will need to be approved by the company’s Articles of Association (AoA).
These are also known as common shares, and they make up the majority of the shares issued by a firm. Equity shares are transferrable and frequently exchanged on stock exchanges by investors. You have the right to receive dividends as an equity shareholder, in addition to voting rights on corporate matters. Dividends, on the other hand, are not fixed and are paid out of the company’s profits. After preference shareholders, equity stockholders get dividends. You should also keep in mind that, due to market volatility and other variables impacting stock markets, equity stockholders are exposed to the most risk as a percentage of their investment.
SHARES OF DIFFERENTIAL VOTING RIGHTS (DVR)
When compared to stock owners, DVR shareholders have less voting rights. Companies pay additional dividends to DVR shareholders to decrease voting rights. DVR shares are less expensive because they have fewer voting rights. The price difference between stock and DVR shares is around 30-40%.
WHY DOES A BUSINESS ISSUE SHARE?
Companies offer stocks (piece of their company) to investors for raising capital to run the business. This helps their company to grow and survive in the competitive market. They also provide investors a piece of the company’s profits.
Investing in stocks yields higher returns than other investment alternatives, and it may help them to multiply their wealth over time.
NOTE: Always remember to open your Demat and trading accounts with a reputable and trustworthy financial partner. Rely on a brokerage firm that can offer cutting-edge trading platforms as well as real-time market data.