Understanding shares and their operation within the stock market is essential for anyone venturing into investments. The share market, a fascinating yet complex entity, often prompts the question— what are shares? This article aims to unravel the mystery surrounding shares and provide clarity on their functions in the stock market, focusing on the Indian context.
What Are Shares?
Shares represent units of ownership in a company. When you buy shares of a company, you essentially purchase a fraction of that company’s equity. Shares are also commonly referred to as stocks. Holding these shares gives you certain rights, such as voting in shareholder meetings and receiving dividends—a portion of the company’s profits distributed among shareholders.
Types of Shares
1. Equity Shares:
These are the most common form of shares and constitute the backbone of the share market. Equity shareholders have voting rights and a claim on the company’s residual earnings in the form of dividends after all obligations are met.
2. Preference Shares:
These shares offer investors preferential rights over equity shares regarding dividends and asset distribution in case the company is liquidated. Preference shareholders typically do not have voting rights.
How Do Shares Work in the Stock Market?
The stock market is a platform where shares are bought and sold. It comprises primary and secondary markets:
Primary Market
In the primary market, companies issue new shares to the public through Initial Public Offerings (IPOs). This process allows companies to raise capital by selling a portion of their equity in the form of shares.
Example Calculation in INR:
Suppose a company issues 1,00,000 shares at an IPO price of INR 500 per share. The capital raised through the IPO would be:
1,00,000 shares × INR 500/share = INR 5,00,00,000
Secondary Market
Once shares are issued in the primary market, they are traded among investors in the secondary market. The share market facilitates these transactions through stock exchanges like the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India.
Buying and Selling Shares
When you buy shares, you place an order through a brokerage firm. The broker executes your order on the stock exchange, and you become a shareholder. Conversely, when you sell shares, the broker finds a buyer, and the transaction is completed.
Determining Share Prices
Share prices fluctuate based on various factors, including:
- Company Performance: Financial health, earnings reports, and business growth directly impact share prices.
- Market Sentiment: Investor perception, news, and macroeconomic factors can cause prices to rise or fall.
- Supply and Demand: Prices increase when demand for shares exceeds supply and decrease when more shares are available than buyers.
Role of Indices in the Share Market
Indices like the Sensex and Nifty 50 offer a snapshot of market performance. They track the performance of a selection of stocks and provide an overview of market trends, helping investors make informed decisions.
How Indices Are Calculated
Consider a simplified index comprising five companies:
|
Company |
Market Capitalization (INR) |
|
A |
10,00,000 |
|
B |
15,00,000 |
|
C |
20,00,000 |
|
D |
25,00,000 |
|
E |
30,00,000 |
|
Total |
1,00,00,000 |
If the base year index is 1,000, and the current combined market capitalization is INR 1,20,00,000, the index would be calculated as follows:
(Current Market Cap / Base Market Cap) * Base Year Index = (1,20,00,000 / 1,00,00,000) * 1000 = 1200
This indicates a 20% increase in the index.
Understanding the basics of what shares are and their functioning within the share market can be a stepping stone towards making informed investment choices. Happy investing!
Key Players in the Share Market
- Retail Investors: Individuals investing personal capital in shares.
- Institutional Investors: Entities like mutual funds and pension funds that invest large sums of money.
- Foreign Institutional Investors (FIIs): Non-domestic entities investing in domestic markets.
Each player impacts the share market dynamics differently, contributing to liquidity and market movement.
Risks and Rewards
Potential Rewards
- Capital Gains: The profit made by selling shares at a higher price than the purchase price.
- Dividends: Periodic payments made by companies to shareholders out of profits.
- Ownership and Voting Rights: Shareholders influence company decisions through voting.
Potential Risks
- Market Volatility: Share prices can be highly volatile, leading to potential losses.
- Economic Factors: Changes in interest rates, inflation, and economic policies can affect share prices.
- Company-Specific Risks: Poor management decisions, scandals, or financial instability can impact share values.
Understanding Dividends
Companies distribute profits to shareholders in the form of dividends. Dividends are usually declared on a per-share basis.
Example Calculation in INR:
If a company declares a dividend of INR 10 per share, and you own 1,000 shares, your dividend income would be:
1,000 shares × INR 10/share = INR 10,000
Conclusion
Investing in the share market can be both rewarding and risky. It requires a thorough understanding of what shares are, how they work, and the factors influencing their prices. Investors must stay informed about market trends, company performance, and economic indicators to make sound investment decisions.
Disclaimer:
Investing in the share market entails risks, and it is crucial for investors to assess all advantages and disadvantages thoroughly before proceeding. This article is intended for informational purposes only and should not be construed as financial advice. Investors should seek professional guidance considering their individual financial situations and goals before engaging in share market transactions in India.
