What is Share, Meaning, Types, Components, Examples, Features and How Does Share Work

What is Share?

A share represents a unit of ownership in a company. When you buy a share, you become one of the company’s owners, alongside other shareholders. This ownership entitles you to a portion of the company’s assets and profits. Shares are traded on stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India. They form the backbone of the equity market, allowing companies to raise capital while providing investors an opportunity to participate in corporate growth.

Shares are fundamental to capital markets because they provide liquidity and price discovery. Investors can buy or sell shares on the exchange any business day, and share prices fluctuate based on supply and demand, news, economic data, and company performance. In India, equity investments have gained popularity over the past two decades, driven by higher returns compared to traditional assets like fixed deposits and gold.

Definition of Share

A share is a financial instrument that signifies fractional ownership in a corporation. Legally, shares are documented in a company’s memorandum and articles of association, which specify the total number of shares the company is allowed to issue, known as authorized shares. Each share carries a face value (typically ₹10 in India) and may trade at a market price that is above or below this face value.

Shares fall under the category of securities and are regulated by the Securities and Exchange Board of India (SEBI). SEBI sets rules for issuance, trading, and disclosure to protect investors’ interests and ensure market integrity. When a company issues new shares, it must comply with SEBI guidelines, as well as the Companies Act, 2013, and relevant provisions of the Indian Contract Act.

Meaning of Share

The meaning of share extends beyond mere stock certificates. It embodies an investor’s stake in a company’s future-prospects. Each share represents a claim on the company’s profits (through dividends) and assets (in case of liquidation). Shares also often carry voting rights, enabling shareholders to influence corporate decisions through general meetings.

In practical terms, owning a share means:

• Economic Interest: You earn dividends when the company declares them.
• Governance Role: You vote on major matters like appointing directors, mergers, or amendments to the company charter.
• Market Value: Your share’s value can appreciate or depreciate based on business performance and market sentiment.

How Does Share Work?

Shares work through a straightforward mechanism:

• Initial Public Offering (IPO): A private company goes public by issuing shares to the public for the first time. This process raises fresh capital.
• Secondary Market Trading: After the IPO, shares trade on the stock exchange between investors at market-determined prices.
• Dividends and Bonuses: Companies can distribute profits via dividends or issue additional shares (bonus shares).
• Voting Rights: Shareholders can vote on key issues at annual or extraordinary general meetings.
• Capital Gains: Investors aim to buy shares at lower prices and sell at higher prices to earn capital gains.

When you place an order through a broker or online trading platform, your buy or sell request enters the exchange’s order book. Matching buy and sell orders determine the trade price and volume.

Types of Share

Companies can issue various types of shares, each with distinct rights and obligations:

Equity Shares (Common Shares):

• Carry voting rights.
• Receive dividends after preference shareholders.
• Offer unlimited upside but no guaranteed return.

Preference Shares:

• Priority in dividend payments at a fixed rate.
• Generally, no voting rights.
• Treated as hybrid instruments between equity and debt.

Bonus Shares:

• Free additional shares issued to existing shareholders in proportion to their holdings.
• Do not dilute ownership percentage but increase share count.

Rights Shares:

• Issued to existing shareholders to raise fresh capital.
• Offered at a discount to market price.
• Shareholders can subscribe, sell, or renounce these rights.

Deferred Shares:

• Dividends paid only after dividends to other classes are fully paid.
• Rarely issued in India.

Sweat Equity Shares:

• Issued to employees or directors in exchange for services.
• Helps retain talent.

Benefits of Share

Investing in shares offers several advantages:

• Capital Appreciation: Potential for significant gains if the company grows.
• Dividend Income: Periodic cash payouts from company profits.
• Liquidity: Shares can be bought or sold easily on stock exchanges.
• Portfolio Diversification: Spreading investments across sectors and companies reduces risk.
• Ownership Rights: Influence corporate decisions through voting.
• Inflation Hedge: Historically, equity returns often outpace inflation over the long term.

For Indian investors, shares of large-cap companies in sectors like IT, pharmaceuticals, and consumer goods have delivered attractive long-term returns.

Features of Share

Key features that define shares include:

• Face Value: The nominal value printed on the share certificate (e.g., ₹10).
• Market Value: The price at which shares trade in the market.
• Voting Rights: Equity shareholders typically have one vote per share.
• Dividend Rights: Entitlement to a portion of distributed profits.
• Transferability: Shares are freely transferable, subject to regulatory compliance.
• Limited Liability: Shareholders’ liability is limited to the amount unpaid on their shares.

Shares may carry special rights, such as cumulative dividends for certain preference shares or convertible options that allow conversion into equity.

Examples of Share

• Tata Consultancy Services (TCS): One of India’s largest IT services firms. Investors in TCS shares have enjoyed steady dividends and capital appreciation over decades.
• Reliance Industries Limited (RIL): A diversified conglomerate with interests in energy, retail, and digital services. RIL’s shares are among the most traded on the NSE.
• HDFC Bank: A leading private-sector bank in India. Its shares are popular for consistent performance and dividends.
• Infosys: Another major IT exporter, known for strong corporate governance and regular bonus issues.
• Bajaj Finance: A non-banking financial company (NBFC) whose shares have delivered high returns driven by retail lending growth.

These examples illustrate how different industry leaders offer varied risk-return profiles and dividend policies.

Components of Share

A share comprises the following components:

• Nominal (Face) Value: The value assigned when issued.
• Premium: Amount paid above face value during issuance (issue price minus face value).
• Discount: If issued below face value, the difference is discount.
• Market Price: Determined by real-time buying and selling on the exchange.
• Dividend Rate: Specified for preference shares.
• Rights Attached: Voting rights, conversion rights, cumulative/non-cumulative dividends.

Understanding these components helps investors assess whether a share issue is at a fair price and gauge potential returns.

Benefits of Owning Shares

Ownership of shares provides:

• Earnings through Dividends: Companies distribute part of their profits.
• Capital Gains: Selling at a higher price than the purchase price.
• Democratic Ownership: Ability to vote on board appointments, mergers, and policy changes.
• Bonus and Rights Issues: Free shares or discounted purchase opportunities.
• Access to Investor Services: Participation in corporate actions, right to inspect financial records.

Owning shares also offers intangible benefits like prestige and a sense of participation in a company’s journey.

Risks Associated with Shares

While shares can deliver high returns, they come with risks:

• Market Risk: Share prices fluctuate due to macroeconomic factors and market sentiment.
• Company-Specific Risk: Poor management decisions, fraud, or business setbacks can erode value.
• Liquidity Risk: Smaller companies may have lower trading volumes, making it hard to exit positions quickly.
• Dividend Risk: Dividends are not guaranteed and can be cut during downturns.
• Regulatory Risk: Changes in government policies can affect sectors differently.
• Volatility: Equities can be more volatile than fixed-income instruments.

Indian investors should balance equity exposure with other asset classes based on risk tolerance and investment horizon.

How Shares are Issued and Regulated

Shares are issued through:

• Initial Public Offering (IPO): The company offers shares to the public for the first time. Companies file a Draft Red Herring Prospectus (DRHP) with SEBI, followed by a Final Prospectus.
• Follow-on Public Offer (FPO): Already listed companies issue additional shares.
• Private Placement: Direct sale to institutional investors.
• Rights Issue: Existing shareholders receive a pro-rata offer to buy new shares.

Regulation in India:

• Securities and Exchange Board of India (SEBI): Oversees issuance, trading, and disclosure norms.
• Companies Act, 2013: Governs company structure, share capital, and shareholder rights.
• Listing Agreement: Compliance requirements for listed companies.
• Stock Exchange Rules: Operational rules of BSE and NSE.

Strict regulation helps protect investors and maintain market fairness.

Why Does a Company Issue Shares?

Companies issue shares to:

• Raise Capital: Fund expansion, research and development, acquisitions, or debt repayment.
• Improve Balance Sheet: Reduce debt-to-equity ratio.
• Enhance Visibility: Listing on a stock exchange raises the company’s profile.
• Employee Incentives: Issue sweat equity or ESOPs (Employee Stock Ownership Plans).
• Mergers and Acquisitions: Use shares as currency for acquisitions.

By issuing equity, companies share both risks and rewards with public investors, fostering transparency and accountability.

Performance Metrics of Share Prices

Investors track several metrics to evaluate share performance:

• Earnings Per Share (EPS): Net profit divided by number of outstanding shares.
• Price-to-Earnings Ratio (P/E): Market price per share divided by EPS.
• Dividend Yield: Annual dividends per share divided by market price.
• Price-to-Book Ratio (P/B): Market price divided by book value per share.
• Beta: Measures volatility relative to the overall market.
• Return on Equity (ROE): Net income divided by shareholder equity.

These ratios help investors compare companies and decide whether shares are overvalued or undervalued.

How to Buy Shares?

To buy shares in India:

• Open a Demat Account: A Dematerialized (Demat) account holds electronic share records.
• Open a Trading Account: Linked to your Demat account through a broker or bank.
• Complete KYC: Submit identity and address proofs.
• Fund Your Account: Transfer money via net banking or UPI.
• Place an Order: Use the broker’s trading platform to place market or limit orders.
• Order Execution: The order executes on the exchange and shares credit to your Demat account.
• Settlement: T+2 rolling settlement completes the transaction.

Choose a reputable broker offering low brokerage, user-friendly platforms, and research support.

How to Sell Shares?

To sell shares:

• Place a Sell Order: Through your trading platform.
• Order Matching: Buy and sell orders match on the exchange.
• Trade Execution: Shares debit from your Demat account and funds credit to your bank.
• Settlement: Also, on a T+2 basis.

Ensure you pay capital gains tax on profits. Long-term holdings (over 12 months) attract lower tax rates compared to short-term holdings.

Share vs. Stock

Although often used interchangeably, there is a subtle difference:

• Share: Refers to a unit of ownership in a specific company (e.g., 100 shares of Infosys).
• Stock: A general term representing ownership in one or more companies (e.g., stock market investments).

In practice, both terms convey ownership rights and economic interest in a business.

Shares Outstanding vs. Market Capitalization

• Shares Outstanding: Total number of shares issued by a company and held by shareholders, including institutional investors and company insiders.
• Market Capitalization: Shares Outstanding multiplied by the current market price per share.

For example, if a company has 10 crore shares outstanding and trades at ₹200 per share, its market cap is ₹2,000 crore. Market cap categorizes companies into large-cap, mid-cap, and small-cap segments.

Shares Authorized vs. Issued vs. Outstanding

• Authorized Shares: Maximum number a company can issue as stated in its charter.
• Issued Shares: Number of shares the company has issued to shareholders, including insiders and institutions.
• Outstanding Shares: Issued shares minus treasury shares (those repurchased and held by the company).

Understanding these distinctions helps investors gauge dilution risk and corporate financing plans.

Shares of Stock and Market Capitalization

Shares of stock represent the building blocks of market capitalization. Market cap reflects the total value investors assign to a company. It guides investment decisions:

• Large Cap: Market cap above ₹20,000 crore, generally more stable.
• Mid Cap: Market cap between ₹5,000-₹20,000 crore, offering balanced growth and risk.
• Small Cap: Market cap below ₹5,000 crore, high growth potential but higher volatility.

Portfolio allocation across market cap segments helps balance risk and reward.

Summary

• A share is a unit of ownership in a company, traded on exchanges like BSE and NSE.
• Shares carry economic, voting, and liquidity rights for investors.
• Types include equity, preference, bonus, rights, and sweat equity shares.
• Benefits: capital gains, dividends, portfolio diversification, and corporate influence.
• Risks: market volatility, company-specific setbacks, liquidity constraints.
• Issuance follows IPOs, FPOs, private placements, and rights issues under SEBI regulation.
• Companies issue shares to raise capital, improve balance sheets, and reward employees.
• Performance metrics: EPS, P/E ratio, dividend yield, P/B ratio, beta, ROE.
• Buying shares requires a Demat and trading account, KYC, and funding; selling follows a reverse process.
• Share vs. stock: share refers to ownership in one company; stock is a broader term.
• Authorized, issued, and outstanding shares denote different stages of share capital.
• Market capitalization equals outstanding shares multiplied by market price, guiding large-, mid-, and small-cap classifications.
• Shares are vital in India’s equity market, offering long-term growth potential when chosen wisely.