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Shares

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Shares

A share  represents a unit of ownership in a company. When an investor buys shares of a company, the investor becomes a shareholder and owns a small part of that company.The owner of shares in a company is a shareholder (or stockholder) of the corporation.

Companies issue shares mainly to raise capital for their business activities, such as expansion, new projects or repayment of debt.

Company → Issues Shares → Investors Buy Shares → Company Raises Capital → Investors Become Part Owners

Features of Shares

  • Ownership: A shareholder owns a portion of the company according to the number of shares held.
  • Voting Rights: Equity shareholders generally have the right to vote on important company matters, subject to the type and terms of shares.
  • Dividend: A company may distribute a part of its profits to shareholders as dividend. However, payment of dividend is not guaranteed.
  • Capital Gains: Investors can earn a profit if they sell their shares at a price higher than the purchase price.
  • Market Risk: Share prices can rise or fall depending on the company’s performance, economic conditions, demand and supply and market expectations.
  • No Fixed Maturity: Equity shares generally do not have a maturity date.
  • Limited Liability: A shareholder’s liability is generally limited to the amount invested or unpaid on the shares held.
  • Transferability: Shares of listed companies can generally be bought and sold through stock exchanges.

How do Investors Earn from Shares?

Dividend

  • A company may distribute a portion of its profits among shareholders.
  • Example: Ravi owns 100 shares and the company declares a dividend of ₹5 per share.
  • Dividend received = 100 × ₹5 = ₹500

Capital Gain

  • An investor earns a capital gain when shares are sold for more than their purchase price.
  • Example: Ravi buys a share for ₹100 and later sells it for ₹130.
  • Capital Gain = ₹30 per share
  • If he sells it for ₹80, he incurs a capital loss of ₹20 per share.

Types of Shares

Equity Shares

  • Equity shares are also referred to as ordinary shares. They are one of the most common kinds of shares. 
  • Equity shares represent ownership in a company.
  • Equity shareholders generally have voting rights and receive dividends depending on the company’s profits and decisions.
  • Equity shareholders generally bear the highest financial risk because they are paid only after all creditors, bondholders, and preference shareholders are fully paid.
  • Owners of these shares have the right to vote on various company matters.
  •  Equity shares are transferable.

Preference Shares

  •  Preference shareholders are paid dividends before equity shareholders and also get priority in repayment of capital if the company is wound up.
  • Preference shares have limited voting rights compared to equity (ordinary) shares.Unlike equity shareholders, preference shareholders typically cannot vote on everyday corporate matters, such as electing the board of directors or approving general resolutions.

Preference Shares under the Companies Act, 2013

Meaning and Preferential Rights — Section 43

  • Section 43 of Companies Act, 2013 defines Preference Share Capital as part of issued share capital carrying preferential rights for dividend payment and capital repayment in winding up.

Voting Rights — Section 47

  • Section 47 of Companies Act, 2013 outlines the voting rights of equity and preference shareholders in a company.
  • Preference shareholders have limited voting rights. Normally, they can vote only on:
    • Resolutions that directly affect the rights attached to their preference shares
    • Winding up of the company
    • Any resolution concerning the repayment or reduction of the company’s equity or preference share capital.
  • How is Voting Power Decided?
    • When preference shareholders are entitled to vote, their voting power is in proportion to the paid-up preference share capital held by them.
  • When both equity and preference shareholders vote, their relative voting rights are maintained in proportion to their respective paid-up share capital.
  • Special Case: Dividend Unpaid for 2 Years
    • If dividend on a particular class of preference shares has not been paid for two years or more, holders of that class get the right to vote on all resolutions of the company.

FAQs

1. What is a share?
A share represents a unit of ownership in a company. A person who owns shares is known as a shareholder or stockholder.

2. Why do companies issue shares?
Companies issue shares to raise capital for purposes such as business expansion, new projects and repayment of debt.

3. How do shareholders earn from shares?
Shareholders can earn through dividends distributed by the company and capital gains when shares are sold at a price higher than their purchase price.

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