Understanding Stocks and Shares: Complete Guide for Beginners

Dear Fin friends!!!
I hope you are all doing well. In this article, we’ll explore stocks and shares. Understanding the basics of the stock market is crucial before you start investing or trading. It’s also essential to be aware of the pros and cons to make informed decisions about whether to invest or trade. This guide contains essential information about stocks or shares.

Stay tuned to learn everything you need to know about the stock or the shares!

• Equity is a financial asset that represents ownership in a company or firm. When someone says, “I have invested in equities,” it means they own part of a company by investing in its stocks. This ownership can be either small or large.
• The equity market is where company shares are issued and traded. (Trading means buying and selling a particular stock or share.)
• The company raises “equity capital” from investors as part of fundraising, and this is reflected in the company’s balance sheet.

• There is no clear differentiation between stocks and shares. There is a very thin, blurry line between stock and share. Often, these two words are used interchangeably.
• If we consider a company as stock, then its small piece is a share. For example, you can say, “I have a single share of this stock.” Both stock and share define fractional ownership of a company.
• You can think of a bunch of shares as stock. In the stock market, different companies’ shares are traded. Shares are subsets of stock, and stock is used as a generic term, whereas shares are used in the case of specific quantities.
• The more you deeply focus on the difference between stock and share, the more you get confused. So, we advise you to keep it simple and not overthink it. Instead, focus on how it works in the financial market.

• A share represents ownership in a business, obtained by purchasing it through a stockbroker. Each share has a price that fluctuates based on various factors.
• Owning a share means owning a small portion of that business. If the company performs well, shareholders may benefit from profits through dividends or increased stock value. Conversely, if the company performs poorly, shareholders may incur losses as stock prices decline.
• The stock market allows individuals to invest in businesses they favor. It provides an opportunity for ownership in companies without directly starting a business.
• Companies issue thousands or even millions of shares, depending on their size. Shareholders vary in ownership, with some owning just a few shares and others owning significant portions, potentially in the hundreds of thousands. Those with substantial holdings are often referred to as company promoters.
• The ownership structure of a company, known as its shareholding pattern, depends on the distribution of shares among individuals and institutions (such as mutual funds, banks, and foreign institutional investors).

• A share price is the price at which shares of a company can be bought or sold in the stock market.
• This price is constantly changing due to fluctuations in supply and demand among investors or traders.
• High demand for a share drives its price up, while low demand can cause the price to decrease.
• The share price reflects the current market value of a single share, influencing the market capitalization of the company as share prices fluctuate.
• Several factors influence share prices, including:
  • Company Performance: How well the company is doing financially.
  • Demand and Supply: The balance between investors wanting to buy and sell shares.
  • Economic Conditions: Both on a small scale (micro) and larger scale (macro).
  • Market Sentiment: Investor perception and confidence in the market.
  • Global Events: Events happening worldwide that impact markets.
• In essence, a stock’s price is a reflection of these factors combined. Understanding these influences helps investors assess the value and potential of a company’s shares in the market.

• Stock prices change rapidly due to continuous transactions by traders at various Bid and Ask prices, influenced by market sentiment and news.
• Electronic trading allows for swift buying and selling of large volumes of shares with a single click, intensifying the frequency of stock price movements.
• In a country like India, where numerous traders engage in frequent buying and selling from different locations, the stock prices naturally fluctuate as supply and demand dynamics shift.
• Understanding these factors helps explain the dynamic nature of stock prices and how they respond to market activities and investor behavior in real time.

• Stock Price Calculation: The stock price is determined based on the latest price at which the most transactions occur. The stock exchange calculates this price in real time and displays it to the public.
• Successful Trade: The successful transaction occurs when a buyer and seller agree on a price and complete a trade, that price becomes the stock price.
• High Volume of Trades: In the real-world stock market, thousands of trades occur based on the Bid and Ask prices.
• Bid Price: The highest price a buyer is willing to pay for a stock, indicating the demand.
• Ask Price: The lowest price a seller is willing to accept for a stock, indicating the supply.
• Market Dynamics: The Bid and Ask prices are set by the buy and sell decisions of individual and institutional investors.
• Supply and Demand: The Bid and Ask prices play a crucial role in determining the stock price. If demand is higher than supply, the stock price goes up. If supply exceeds demand, the stock price goes down.

Understanding these concepts helps explain how stock prices are set and why they fluctuate.

• Equity shares: Also known as ordinary or common shares, the owners of these shares are allowed for voting rights on company decisions and Equity shares can also be transferred.
  • Authorized Share capital: The maximum amount of capital a company raised through equity shares at a particular time.
  • Issued share capital: This is a part of authorized share capital which is issued to investors in the form of shares.
  • Subscribed Share Capital: The maximum number of share capital subscribed by the investors during the IPO.
  • Paid-up share Capital: This is a part of subscribed share capital that investors buy in the form of shares during the IPO.
  • Right issue share: A rights issue is a type of share that a company offers to its existing shareholders before making them available to outside investors. This process allows the company to raise additional capital from its current shareholders. In the short term, the share price might decrease because the ownership of existing investors is diluted if they do not participate in the rights issue.
  • Bonus shares: Bonus shares are issued by a company to its existing shareholders as a reward for their loyalty and as a form of monetary compensation. Shareholders receive these shares for free, without having to pay anything. Issuing bonus shares is generally considered a positive sign, indicating the company’s good financial health and confidence in its future performance.
  • Sweat Equity shares: Sweat equity shares are issued to company employees as a reward or compensation. When a company recognizes an employee’s exceptional performance, it may issue sweat equity shares to retain them, granting the employee ownership.
• Preferred shares: Preferred shares are a type of stock that provides dividends or profits to shareholders before ordinary shareholders receive theirs. Although preferred shareholders do not have voting rights, they have a higher priority in the event of a company’s liquidation.
  • Cumulative and Non-Cumulative Preference Shares: Those who have Cumulative Preference shares are eligible for cumulative dividends, meaning if the company skips a dividend payment in any year, those unpaid dividends accumulate and are paid out later. In contrast, the Non-Cumulative Preference Shareholders are not eligible for this.
  • Redeemable & Irredeemable Preference Share: The Redeemable preference shareholders are eligible to redeem the shares after a certain period (Later date) at a predetermined price. With this type of shares company can buy back the shares. In contrast, the Irredeemable Preference Shares are not eligible for this.
  • Participating & Non-Participating Preference Share: Those who have Participating shares are eligible to get surplus profits after the dividend is paid to the equity shareholder, in contrast, non-participating shareholders are not eligible for this.
  • Convertible & Non-Convertible Preference Shares: Convertible shares can be converted as equity shares after a certain timeline as per the company’s Articles of Association (AoA). In contrast non-Convertible are the opposite i.e., it cannot be converted to equity shares.

• Treasury Stocks: These are shares that are not included in the calculation of market capitalization. Treasury stocks were previously traded in the stock market but have been bought back by the company to adjust its capital structure. They are recorded in the company’s balance sheet under the shareholder’s equity section (contra-equity account).
• The Treasury Stocks are not traded publicly. These shares do not have voting rights and do not pay dividends. Since they are not outstanding shares, treasury stocks are not considered when calculating earnings per share (EPS).
• There are some reasons why Treasury Stocks came into to picture. A few are mentioned below:
  • Share Buybacks: When Companies repurchase their outstanding shares from the public market.
  • Employee Stock Ownership Plans (ESOPs): Treasury stocks may be used to fulfill employee stock options or stock-based compensation plans.
  • Acquisitions and Mergers: During acquisitions and mergers the Treasury stocks are kept in the company’s balance sheet.
  • Capital Restructuring: When Companies use treasury stocks as part of capital restructuring efforts to enhance financial metrics.

• The market capitalization of a stock determines how big a company is. The more the market capitalization, the bigger the company. It is an important metric to measure the value of a company
• Market capitalization of a publicly listed company is calculated by the “Current Stock Price” multiplied by the “Total Number of Outstanding Shares”. This is the total value of a company decided by the market.
• Market Capitalization= “Current Stock Price” x “Total Number of Outstanding Shares”

“Outstanding Shares” refers to the shares owned by individuals or institutions and available for trading.

1. Large-Cap Stocks: These stocks have a market capitalization greater than ₹20,000 Crore. They are generally well-established companies with lower volatility and lower risk because they have a large number of outstanding shares, making it difficult for investors or traders to significantly impact the stock price through individual transactions.
2. Mid-Cap Stocks: These stocks have a market capitalization between ₹5,000 Crore and ₹20,000 Crore. They offer a balance between stability and growth potential, with moderate risk and volatility.
3. Small-Cap Stocks: These stocks have a market capitalization between ₹1,000 Crore and ₹5,000 Crore. They tend to be more volatile and riskier, as they have fewer outstanding shares, making them more susceptible to large price swings from bulk transactions by investors or traders.
4. Micro-Cap Stocks: These stocks have a market capitalization of less than ₹1,000 Crore. They are highly volatile and speculative, posing the highest risk and potential for significant returns due to their small size and susceptibility to large price movements.

Overall, the larger the market capitalization, the lower the volatility and risk, and vice versa.

Dear Fin friends, thank you for taking the time to read this article. If you found it informative, please share it with your friends and family to help spread financial literacy. Stay tuned for our next article on finance. Until then, take care, stay healthy, and be prosperous!!!