In simple language, the share is an “ownership”.Share can be defined as a term that is used to transfer ownership of a company to shareholders. The people who invest in a business or company are known as “Shareholders“.If you buy a part of the share of a company, then you are known as a shareholder of that company.
For example, if you buy a 10% share of an “ABC “company, then you are the “owner” or “shareholder ” of that “ABC” company.
The simple meaning of share can be defined as a small part of the capital. Share is the ownership percentage in the company. Ownership percentage means when you buy some share of any company ownership of some % is given to you.
The total capital of the company is divided into units of a small part, each such unit is known as a share. An exchangeable piece of the value of the company, which can be fluctuated up or down.
Why do companies issue shares?
let’s discuss with a simple example:
Suppose you have a company, which manufactures dietary
Supplements. Your capital employed is Rs 1,00,00000, with
1 plant and your company produce 12,000 dietary supplements
Per month.
It means you can supply 12,000 dietary supplements to the market per month. But if you get an order of 60,000 dietary supplements Per month, then your company can not supply, because your production capacity per month is 12,000 with 1 plant.
Now either you can reject the order of 60,000 dietary supplements or you have to build new plants to produce more quantity to supply in the market. To add new plants you need more capital. If your company produces 12,000 dietary supplements with 1 plant then you have to build extra 4 factories to produce 60,000 dietary supplements.
To build new plants you need extra capital. You have some options for capital raise. Such as Bank loans, Unsecured loans, Borrow money from friends and relatives, and IPO. Your company can issue IPO and raise capital.
From The above example, we can understand that companies issue shares to grow business,& for the financial resource. So the simple fundamental thing is companies provide a small fraction of ownership to the general public, and take money from the public for ownership and they grow, expand their business for more profit. Share Market is a kind of capital source for business expansion. Only public limited companies are listed in the share market.
Companies prefer to make money through the IPO for business expansion instead of bank loans because it can help to reduce the interest burden and principal repayment, it is easier to raise huge capital and they can do business with full potential and focus.
In a nutshell, a share is referred to as a unit of ownership that represents an equal proportion of the company’s capital. A share entitles the shareholders to an equal claim on profit and losses of the company. For Example, if a company has 1,00,000 shares of the outstanding stock and a person owns 10000 shares, that person would own and have a claim to 10 % of the company’s assets and earnings.
Types of share:
The Share can be categorized into two types:
– Equity share
-Preference share
An equity share is also known as an ordinary share. Equity shareholders are treated as the real owners of the company. Equity share is regarded as a long-term financial resource for a company. A person who owns an equity share of the company is known as the equity shareholder or real owner.
The Company provides dividends to equity shareholders. In simple language, the dividend is part of the profit of the company. High profit generates high dividends and low profit generates low dividends. Therefore, in comparison to preference share risk is high in equity share.
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Shareholders in such shares have the right to vote, share profits, and claim assets of a company.
A preference share is preferential in nature. A person who owns a preference share
is called a preference shareholder. Such shareholders have a preference over
equity shareholders.
The dividend is fixed for preference shareholders. Shareholders in such shares have no right to vote and claim the assets of a company. Such shareholders have preference over equity shareholders because both the dividend and repayment of capital are paid first to preference shareholders.
