Most people have hard time understanding the concepts of shares of the companies and stock market.

Let us now try to understand those concepts in the simplest manner. 

What is share?

The general meaning of ‘share’ is a ‘part or portion of something’. 

Let us think you have invited your friends to help you with garden work which you are unable to do alone,  they will expect a share in fruits or vegetables from the garden for the work done.

 If your friends help you cook some food,  they will expect a share in the food.

It is not a surprise because, for the effort that people have put, they are expecting a share of the result, as a reward for their effort.

In the same way, if you want to establish a huge company that requires a lot of capital (investment) which you cannot bring on the table alone, you take the help of friends and other people if necessary, and give them a ‘share’ of the company which you are establishing.

Because they’ve helped you in establishing the company by giving you the money, you make them part owners of the company and give them a part of your company’s profits.

As there are many people investing in the company, the records of who invested how much should be clearly maintained. That is where the concept of shares appear.

So now let us understand things technically.

REGISTRATION OF COMPANY- As external people are involved in investment, and they may not know you personally, to make things official, you give your company a separate entity(personality) by registering the company. 

INITIAL PUBLIC OFFERING (IPO)- Once you register the company, you can officially make a statement to the public that they can help raise the capital. The general public or Financial Institutions who are interested to invest in your company will accept the offer. 

SHARES- Share is a small part of the company’s capital. You will divide the total capital required to start a company in small parts to sell to the interested investors in the form of Shares.

For example-

If you need 1000 bucks to start a company, you will divide this into 100 parts of 10 bucks each. Each part is called a share.

It is easy to get 10 bucks from hundred people when compared to getting 1000 from single person.

A person who is ready to invest 50 bucks can get 5 shares in your company.

FACE VALUE-  Anyone who wants a share in your company has to buy it for 10 bucks.

So, 10 bucks is the face value of the share. It is also known as Par value, Nominal value or Book value.

STOCK- Stock is basically a bunch of shares put together. A person may buy any number of shares in the company and it is collectively known as stock.

SHAREHOLDERS- All the people who have bought shares of your company, become the shareholders and they get a share certificate as proof of purchased shares. This share certificate contains details like the name of the company, the face value of the share,  number of shares bought, and other details.

STOCK MARKET- Sometimes, shareholders decide to sell their shares whenever they need liquid cash and outsiders want to buy shares in your company looking at the profits and the brand image of the company. To make this possible, there is a stock market where people who are ready to sell their stock can meet the buyers and buyers who are ready to purchase stock can meet the sellers. This is like a market place but for stocks.

DIVIDEND- As we already know that shareholders have invested the money and have become part owners of the company,  they deserve to get a part of the profits made by the company. This is the reward that they get for investing the money in the company. 

Dividend is a small percentage of the profit which is distributed among the shareholders per each share. The percentage of dividend is mutually decided by shareholders and board of directors of the company.

Continuing the previous example

Your company made a profit of 100 bucks, and the dividend is 10%, there are 100 shares in total. Now each share is 10 bucks and 10% of each share is 0.1 and the total dividend is 10 bucks which has to be divided to the shareholders. That means you spend 10 bucks from the total profit of 100 as the dividend. 

Dividend is always calculated on the Face value of the share.

MARKET VALUE- The market value of a share is the price at which the shares are sold in the stock market. If your company is in profits and has more assets and brand value, people will be ready to buy your company shares for a higher price(more than face value) thinking that the trend would continue and the value of the shares would go even higher. If your company is in losses and you lose your assets, the public confidence goes down and people will sell the shares quickly even for a less price thinking that the share price may further reduce in the future.

SHARES AT PAR/PREMIUM/DISCOUNT- 

If the shares are sold for Face value, then it is considered as shares are sold at par.

If the shares are sold for a higher price than the face value, then it is considered as shares are sold at premium.

If the shares are sold for a lower price than the face value, then it is considered as shares are sold at discount. 

Why is stock market important?

Stock market is always a part of newspapers and TV news. Media always share stock prices of top companies and Stock Exchange points as if it is a very important thing. You might wonder why would you be concerned about some companies stock price?

Well, a company is owned not only by the people who had the idea to start the company, but also by the shareholders. A company share price increasing denotes all the shareholders who are also part of society getting good money. Reduction in the value of shares denotes a large group of people losing their money. This can affect society’s financial condition.

Stock Market is all about predictions and risk assessment. Even though you know basic concepts like what is a share and who is a shareholder, you still can not assess what a company’s share value is going to be in the future. You need a whole different level of understanding stocks to invest and not lose your money in stock market. Even topmost companies in the world sometimes have bad days in the stock market and their market value of shares is reduced.

So, please do not blindly invest in the shares thinking that they would profit you.

Hope this article has helped clear your doubts regarding shares and stock market.

Written by

Rajasimha.B

Instagram- rajasimha0