Shares and share market are words that are quite commonplace in the world of finance. Anyone interested in investing must have heard of what shares are. If you are willing to become an investor or want to explore more about how investments are made, knowing what are shares can help you a good deal.
What are Shares?
Shares are basically the unit measurement of a company’s capital. A company raising funds issues shares in the market for interested investors. Each share represents a unit of the capital.
The question of what are shares remains incomplete without asking what is the share market. The place where shares are bought and sold is called the share market.
Shares are one of the most popular forms of investment.
Types of Shares
There are basically two types of shares: equity shares and preference shares. Both these types are discussed below.
Equity shares are also called ordinary shares. These are the most common types of shares issued by the company. Investors trade mostly in equity shares as these shares are also transferable. By being an equity shareholder you get the right to vote on the different issues concerning the company. The equity shareholders are entitled to the dividends although the amount may vary.
The important thing to keep in mind regarding equity shares is that they are considered highly risky as they are directly subject to market fluctuations and volatility.
There are different types of equity shares that are classified on the basis of share capital, definition and returns.
Based on Share Capital
The capital raised by a particular company through the issuing of shares is called its share capital. Equity shares classified based on shares are as follows:
Authorised Share Capital: Every company is required to specify the maximum amount their shares are to raise. The limit, however, can be increased later through additional fees and following the requisite regulations.
Issued Share Capital: It refers to the specified part of the company’s capital which it is going to offer to the investors in the form of shares.
Subscribed Share Capital: The part of the issued capital which the investors subscribe to is called subscribed share capital.
On The Basis Of Definition
The equity shares classified on the basis of definition are as follows:
Bonus Shares: When a company offers additional shares to the existing shareholder free of cost or as a gift they are called bonus shares.
Rights Shares: Rights shares provide the benefit to the existing investors of purchasing from their company new shares before they are sold to others on the share market.
Sweat Equity Shares: When the shares are allotted to an employee whose contribution has helped the company in some way they are called sweat equity shares.
On The Basis Of Returns
The types of equity shares on the basis of returns are as given below:
Dividend Shares: A company can distribute the profits it earned by giving new shares on a proportional basis.
Growth Shares: Some companies have exceptional shares called growth shares. These shares are exceptional in their growth and this is why companies instead of offering dividends provide these shares to the investors.
Value shares: Value shares refer to the type of shares which are sold at a lower price. Investors can purchase them easily in the form of dividends and see them grow in the coming future.
Preference shares, as the name suggests, are the shares that give preference to investors over equity shares. They are the first to receive any profit the company makes. Even in the case of the liquidation of the company the preference shareholders are the first to be paid.
The different type of preference shares are as follows:
Cumulative Preference Shares: If the company does not declare the annual dividends to be paid to the preference shareholder, his benefit will be carried forward to the next year.
Participating Preference Shares: Participating preference shares are those shares which allow the investor to receive extra profit beyond the dividends if there are any.
Convertible Preference Shares: These shares can be converted to equity shares upon request.
Demat and Trading Account
Once you have figured out what are shares and the types they have it is also important to know about Demat and trading accounts. A Demat Account is used to store the shares and equities of an investor. A trading account, on the other hand, is required to trade in the share market. An investor has to use both the Demat and trading account to transact in shares.
What are shares has little to do with just buying and selling them on the share market for profit. As an investor, it should be your approach to give them time to grow so that they can bring you better returns in the longer term. By knowing what are shares along with their definition, types and other such factors you can make the right decisions in the share market.