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- It is also known as stock.
- It is a representation of units of ownership of the company which is reflection of the capital that has been brought in by shareholders to run the company.
- It gives the shareholders a part of profit (known as dividend)
- It gives the shareholders the voting powers in some cases.
Two types of shares:
1. Equity Shares
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- Real ownership in the company. The holder of equity shares become part of profit as well as loss in the company. Thus, it reflects a risky investment.
- It gives the shareholder voting power in the decision-making process of the company on important decisions like choosing chairman of the Board, capacity expansion or any other decisions.
- The holder of equity share can earn dividend which is declared by the Board of Directors of the company.
2. Preferential Shares
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- Only fixed dividend earning but no voting rights.
- The returns are generally lower than equity shares in long-term.
How is money raised through the equity route?
1. Initial Public Offering (IPO): An IPO is essentially a fundraising method used by large companies, in which the company sells its shares to the public for the first time.
2. Follow-on Public Offering (FPO): A follow-on public offer (FPO) is the issuance of shares to investors by a company which is already listed on a stock exchange. It increases the number of free-floating shares.
3. Rights Issue: A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. It is generally offered at a discounted rate than the current market price of the share.
4. Private Placement: A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than publicly on the open market.
Some important terminologies
1. Market Capitalisation: Total value of all the shares of a company listed on any stock exchange (also known as shares outstanding or free-floating shares)
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M-cap = Current Market Price (CMP) of each share * Number of shares outstanding |
Based on market capitalisation, companies on stock market have been divided into various categories:
a) Blue Chip: Giant companies and are having m-cap of more than Rs 1 lakh crore. Mainly included in top 50 companies
b) Large Cap: Top 100 companies in terms of m-cap (Value generally more than Rs 20,000 crore or more)
c) Mid Cap: 100 to 250 companies (Value generally more than Rs 5000 crore – Rs 20,000 crore)
d) Small Cap: Below 250 (Value less than Rs 5000 crore)
e) Microcap: Those companies which have very low m-cap (order of few 100 crores rupees worth)
f) Penny stocks: Whose current market prices are hovering around Re 1.
2. Earnings Per Share (EPS) = It indicates how much profit each outstanding share of common stock has earned.
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EPS = Net Profit/ Total average shares outstanding |
3. Share Buyback: When a company repurchases its own shares. It leads to a reduction in the number of shares outstanding and increases the market price of the shares.
4. Stock split: A stock split is when a company divides and increases the number of shares available to buy and sell on an exchange. A stock split lowers its stock price but doesn’t weaken its value to current shareholders.
5. Bull Market: Market on a whole is rising and is also expected to continue rising.
6. Bear Market: A correction in the market of the order of 20% or more and there is a pessimism in the market of further slump.
7. Alpha: It is the excess return on an investment after adjusting for market-related volatility and random fluctuations. It represents how much an investment’s actual return exceeded its expected return, based on its risk level. It is used to evaluate whether an investment outperformed a certain benchmark.
8. Beta: It measures how volatile an asset is compared to the overall market. It calculates the risk level of an investment.
For non-listed companies (mainly start-ups)
1. Private Equity: private equity (PE) is stock in a private company that does not offer stock to the general public. Private equity is offered instead to a select group of investors who mainly act as co-founders or venture capitalists.
2. Seed Funding: Seed capital is the initial amount of money an entrepreneur uses to start a business. Often, this money comes from family, friends, early shareholders or angel investors.
3. Bootstrapped funding: If no funding is raised and all the money has been put-in by the founder itself or with the support of family and friends. Here, all shares remain with the founder.
4. Angel Investors: An angel investor provides initial seed money for startup businesses, usually in exchange for ownership equity in the company. Here, shares are diluted to give some to angel investors.
5. Venture Capital: Capital given to an existing start-up which has already started operations and has a huge potential to grow.
Stock Exchanges
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- It is a marketplace or platform where securities are traded.
- It necessitates the use of demat account for trading.
- Only those securities which are listed on respective stock exchanges are traded.
India’s 2 leading Stock Exchanges:
1. Bombay Stock Exchange (BSE)
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- Oldest Stock Exchange in Asia
- Major Index: SENSEX, which is the index of Top 30 companies listed on BSE in terms of m-cap.
2. National Stock Exchange (NSE)
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- Largest Stock exchange in India
- Major Index: NIFTY, which is the index of Top 50 companies listed on NSE in terms of m-cap.
