There are many types of instruments in the stock market like shares, debentures, mutual funds, futures contracts, options, etc. We will discuss shares and their types in this article. There are approximately 18 million investors in the stock market.
When a company wants to raise funds for its expansion or to fulfill its requirement of working capital the first option is the company can borrow money from banks or any other sources and the second option is to issue shares to investors and offer ownership of the company.
Share as the name indicates it is a unit of ownership in the particular company. Suppose if an investor holds 2 or 3% shareholding in the company, it means that the investor holds 2 or 3% ownership in that particular company. Shareholders are eligible to get dividends from the profits of the company and also liable for the losses of the company. Means shareholders are the same rights and liability as owners of any institution.
We can divide shares into two types first is Equity shares and the second are preference shares. We can say equity shares are ordinary shares. Generally, this is the most common type of shares and companies issues equity shares in bulk. Most of the traders and investors trade and invest through equity shares. Equity shares are easily transferable and tradable in stock exchanges. An equity shareholder has a right to vote on company issues and has the same status as an owner. Equity shareholder gets dividend from the profit of the company. The income/return is in the form of dividend and dividend depends upon the profit of the company. An equity shareholder gets dividends only when the company generates profit and declares dividends. If any company doesn’t generate profit and does not declare any dividend the equity shareholder gets nothing as a return on his investment. On the other part if any investor invests in the form of a loan to the company he is eligible to get a return in the form of interest no matter company is making a profit or loss.
As we discussed earlier company raises capital through issue shares. The process of issuing shares is called initial public offerings. The company can not raise capital more than its Authorized capital. Authorized capital is the maximum amount of capital that was prescribed in the memorandum of associations in the particular company. It is necessary to mention here that authorized capital can be increased by paying additional fees and completing further legal requirements. The portion from authorized capital a company offers its shares through an initial public offer is called issued share capital. The investor subscribed the portion of issued capital is called subscribed share capital and lastly the actual amount paid by the investors is called paid-up capital. We are SEBI Registered Research analyst providing daily intraday tips, trade with one of the best stock tips providers in India.
We can classify equity shares if four types. Bonus shares, bonus shares are issued to existing shareholders free of cost. Right shares, Right shares are also issued to existing shares holders but they have to pay consideration for new shares at less rate from the current market of the shares in the stock exchange. Sweat equity shares, when a company rewards any employee through issuing equity shares these shares are called sweat equity shares.