WHAT ARE SHARES? Capital market investments are of different kinds. Each investment has certain features, provides specific benefits and serves specific purposes. One of the common ways of making an investment is through purchase of shares in a company. Shares are a mode of holding ownership in a company. Holding shares means becoming a part owner of a company. One can enjoy all the benefits that come with ownership keeping in mind the consequent risks. In common parlance, investment activities are referred to as buying of shares and those who hold the shares are known as shareholders. Alternatively, it is also known as buying equity in a company and shareholders are also known as equity holders or equity shareholders. Shares are also known as scripts traded on the stock exchange. DEALING IN SHARES The term shares are used in relation with a company and there are two ways in which the shares are usually purchased and sold. There are companies, which are listed on a stock exchange. Shares of such companies can be bought and sold on the exchange. An investor can buy or sell the shares by undertaking a trade on the stock exchange through a broker. When the shares are not traded on the exchange, they are bought either from an existing shareholder or directly from the company. A company is said to make an initial public offer, when it is making an issue of new shares to the public for the first time. Subsequent issues are known as follow on public offers. The shares offered can either be newly issued shares or shares of the existing holders that are being offered to the public. Shares are instruments through which companies raise funds from a large number of investors spread across the world. Since the capital requirement of several businesses is quite large, it is not possible for a small number of people to raise this kind of capital. It makes good sense, therefore, to have a corporate structure where a large number of people get together and pool their money through the purchase of shares. Buying shares in listed public limited companies is a good option because the number of members is more than 50 and there is no restriction on the selling of the shares. So, the investor can buy a holding in the company to earn some returns and sell it off when they feel they are getting a good price or they want to switch their investment to a better option. Shares entitle a person to earn a dividend from the company. They also carry a risk in that if the company winds up business, the shareholders will be the last ones to get their money. This means equity shareholders will be paid only when there is some money left after all the outsiders like creditors have been paid their dues. Thus, it is possible that there might not be anything left for the equity shareholders when the distribution of the assets takes place. The liability of the shareholder is limited in the sense that he is required to pay only the amount of the value of shares. The company cannot, under any circumstances, ask the shareholder to pay any sum in excess of this amount for any reason. Overall, the highest risk in the investment is for the equity shareholders because there might not be any sum coming back to the shareholder when the company shuts its business. In terms of day-to-day investment, the risk is seen differently as it might happen that the value of the equity shares on a stock exchange will fall after a person has purchased it leading to a loss when this is sold. This might result in the investor actually earning negative returns from the investment. The upside is that the gains can be huge resulting in the value of the investment rising quite sharply in a short period.
 


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09/09/2012 00:25

Great info, thanks

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