Lesson 5 — What Are Shares (Equity)?
Subtitle: Understanding Ownership in a Company and How Shares Work in the Stock Market
One of the most important concepts in the stock market is the idea of shares, also known as equity. For beginners, these terms may sound technical, but the actual meaning is straightforward: shares represent ownership in a company.
When you buy a share, you are not just buying a number on a screen. You are buying a small piece of the business. This makes you a shareholder, which means you own a fraction of that company.
Why Do Companies Issue Shares?
Companies issue shares because they need money to grow. Businesses require capital for:
- building factories and offices
- hiring employees
- research and innovation
- expanding into new markets
- paying off debt
- developing new products
Instead of taking loans and paying interest, companies can raise money by selling ownership to the public. This process is known as equity financing.
What Does a Share Represent?
A share is a unit of ownership. If a company has 1,00,000 total shares and you own 10,000, you own 10% of the company. Even if you own only one share, you still own a tiny part of the business.
Shares vs Equity — What’s the Difference?
Many beginners confuse these words. They are related:
- Equity = total ownership of the company
- Shares = units of ownership into which equity is divided
Imagine a pizza: the whole pizza is equity, and the slices are shares.
How Investors Benefit from Shares
Investors buy shares for two main reasons:
1. Capital Appreciation (Price Increase)
If you buy a share at ₹200 and later sell it at ₹350, you earn ₹150 profit. This is known as capital gains.
2. Dividends (Profit Sharing)
Some companies share a portion of their profit with shareholders. This payment is called a dividend.
Do Shareholders Have Rights?
Yes. As a part-owner, shareholders receive rights such as:
- voting in company decisions
- receiving dividends (if declared)
- receiving bonuses
- participating in rights issues
- access to company disclosures and reports
Types of Shares
Companies mainly issue two types of shares:
1. Equity Shares
These give ownership, voting power, and sometimes dividends.
2. Preference Shares
Preference shareholders receive dividends before equity shareholders but usually do not have voting rights.
How Shares Come into Existence
Shares are created in the Primary Market through:
- IPO (Initial Public Offering)
- FPO (Follow-On Public Offering)
- Rights Issue
- Private Placement
After being issued, shares are traded on NSE and BSE in the Secondary Market.
Why Share Prices Change
Share prices fluctuate due to many factors such as:
- company performance
- global events
- demand and supply
- economic conditions
- market sentiment
- industry trends
- future expectations
Market Capitalization
The total value of a listed company is known as its market capitalization.
Formula: Market Cap = Share Price × Total Shares
Based on market cap, companies are classified as:
- Large Cap
- Mid Cap
- Small Cap
Importance of Shares for the Economy
Shares play a major role in:
- encouraging business growth
- generating employment
- driving innovation
- attracting global investment
- increasing tax revenue
- boosting GDP
Without shares, companies would depend heavily on loans, slowing down economic development.
Common Misconceptions About Shares
Many beginners believe:
- stock investing is gambling
- only rich people can invest
- returns are pure luck
- companies guarantee returns
In reality, shares represent ownership, not luck. Returns depend on the company’s real-world performance.
Conclusion
Shares are the basic building blocks of the stock market. They represent ownership in a company, allow investors to participate in business growth, and enable companies to raise capital efficiently. Understanding shares is the first step in understanding how wealth is created in modern financial markets.
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