What are Shares? Why will a company issue shares?

Hey friends, welcome to Stock's Knows. Today's topic of the article is: what are shares? Why any company will issue shares?

In simple words, Shares are ownership part of something. But in the market, this part ownership is of any company or organization's profit.

Do you think, if a share means ownership then companies issuing shares are selling their ownership, this is true that companies are selling their ownership but if you just have shares of any company you don't have any right to use their products or services without paying them.

i.e. If you have shares of Dmart you don't have right to go to any of DMart store and take anything from that without paying them.

There are two types of shares:

1) Preference shares:

A Preference shareholder has right to get preference to receive money while liquidation of a company after paying to all the debt holders.

1)Preference shareholders do not have any voting rights.

2)They only paid by mostly fixed or at fixed rate dividend and capital after completing the term of preference issued.

3)Preference shares are not traded on the stock market.

2)Common or Equity shares:Remaining all the shares which do not have right of preference are known as common or equity shares. All the shares traded in the stock market, are common or equity shares.

As Equity or common Shareholder, you have some benefits:

1) You can sell your shares of any company to anyone in open market at any time and any price.

If you purchased a company's 100 shares at around Rs.100 and after some time you notice that price of that shares reached to Rs.200 per share and if you want to sell then you can sell shares you owned either full or part of it at Rs.200 per share.

2) You have a right to vote in decisions taken in Shareholder 's meeting as a proportion of shares owned by you.

3) You have a right to get dividend at any time when declared by a company as a proportion of shares owned by you.

If a company declares the dividend of Rs.5 per share and if you have 100 shares of that company. You will receive Rs.500 to your account.

Why will a company issue shares?

A company’s major purpose of issuing shares is to collect capital for improvements in the company like reducing loans, for working capital, for general corporate purposes, to purchase new instruments or machines or to build buildings or factories or any plants or maybe something different.

Benefits of issuing shares rather than taking loans from banks or any institutions.

1)The major benefit of issuing shares rather than taking debts (loans or bonds) is that if a company suffer from economic slowdown it doesn’t need to pay hefty interests to debt holders so that it can survive in bad time also.

While if a company have higher levels of debt as compare to equity or share capital then in bad time also it needs to pay hefty interests. Though a company is profitable in its top line but may not be profitable in the bottom line and if a company isn’t able to pay interest then it may be going to bankruptcy and maybe the company will not survive. i.e.

Image source: Screener.in

Videocon industries have declared the standalone result of Mar 2017, operating profit was 1184.94 Cr and Net profit of -1915.68 Cr, due to the high-interest payment due of 3205.80 Cr, if it hasn’t taken such high loans it doesn’t have to pay such hefty interest and it would be profitable in net profit.

2)Although a company needs to pay a dividend. But dividend policy is depending on the company if a company is suffering from an economic slowdown or weaken performance then it doesn’t need to pay a dividend to its shareholders.

3)While liquidation of a company (if it happens) debt owners are preferred to pay by selling assets of a company after that preference shareowners are payable and then equity shareholders are payable.

Benefits to shareholders to buying shares:

1)Price of shares of any company depends in long-term on performance of company, a well-known quote by Ben Graham is “In short run, market is voting machine, but in long run it is a weighing machine.” means that in short-term price of a company may not be depends on its performance but in long term it depends on performance of that company.

If a company do well in long run, in the long run, the price of its shares will go higher which will give benefit to its shareholders as capital appreciation. If a company does not do well in long run then in long run also the share price of it will go lower which will give drawbacks to its shareholders.

2)If a company give dividend then it will also benefit shareholders. Though it is not necessary to declare dividend it depends on a company’s dividend policy.

Hence investment in equity is risky, any investment in any company should be done after doing proper research on that company.

This was the answer to what are shares and why a company will issue shares. Below is the video link to my YouTube channel’s video on what are shares and why a company will issue shares? In the video, I took an example to explain what are shares and why they are issued.