Thinking of buying shares in your favorite company? How much do you know about owning a share of any company? What does it mean, when you buy shares in a company? and rights you get once you own shares of any company? There are many more similar questions and many of you already know the answers as well. But, there are a majority of people who don’t know much about share.
Most of the new investors or you can say beginner investors in the stock market, think of a share as a commodity which could be bought at a certain price and sold at other prices. If the price of the bought share goes up, profit could be booked and if it goes down then it will be a loss.
It could be all about the share market if you are only there to buy any random share at some price and sell at higher or lower prices and book profit/loss accordingly. But owning a share doesn’t limit to just buying or selling. It gives you other rights also in the company in which you have purchased or own shares. But, one needs to understand the basics and what does it mean when you buy a share of a company.
- What Is A Share Of A Company?
- How Does Price Of A Share Go Up or Down?
- What Does It Mean When You Own A Company’s Stock/Share?
- Key Advantages Of Buying Shares
- Key Disadvantages Of Investing In Shares
- Can You Buy Shares In A Company You Work For?
- What Happens To Stocks When The Company Goes Bankrupt?
- What Happens To Shares You Own When The Company Gets Delisted?
What Is A Share Of A Company?
When a company needs funds to run or to expand its business, they have two options wither they will go for the loan i.e. debt or offer a partnership to the investors willing to pay the needed fund. They need to pay interest if they take a loan whereas they need to share the company’s profit if they accept funds from the investors with whom the partnership is being made.
Companies evaluate and adjust their net worth based on their assets like infrastructure, land, patents, liability, license, etc. Once, they have the estimated net worth of the company, they divide them or liquidate into the number of pieces with equal rights in the company. This is called a share which is nothing but a small part of the ownership in the company.
When a company lists these shares on the country’s stock exchange, it could be bought by any eligible investors. It is also referred to as equity, stocks, financial securities, etc. To hold the bought shares, you need a Demat Account and I’m assuming you already aware of it.
A Demat Account is an account that is used to hold the financial securities in the electronic form.
Buying and selling of these stocks happens in the share market. Once you have the Demat and Trading account, you can start buying your favorite company’s share and sell when you see yourself in profit. Many people buy and sell stocks/shares in a single day called Intraday Trading but you should avoid losing your hard-earned money. Try to be an investor rather trader to remain profitable in the long run.
How Does Price Of A Share Go Up or Down?
Price of a particular share of fully based on the demand and supply. You must have seen the price fluctuation of goods in the market.
Let’s assume, the share of a company “A” is trading at INR 100 but suddenly there is a demand for that share due to the company’s good performance, promising future business plan, and any other factors. Now many investors are willing to buy the shares at higher than the current rate say INR 110.
On the other hand, investors who have already bought the share at a lower rate (say INR 80) and owns them will try to sell at INR 110 and book a profit of INR 30.
When this swap of ownership happens, the price of the same share goes up by 10 points and price becomes INR 110 in this example.
Now, consider the scenario where the company in which you have bought the shares is not doing good and there is a serious problem in their management. You realize that the company is not going to perform well in the future and selling the shares is the only best thing you can do.
However, other investors are also thinking the same therefore they are not willing to buy the share at a higher rate rather they will offer a lower rate (say INR 60) than the current share price. Since you want to sell the share desperately, you will accept the offer and get rid of those shares.
Once this trade happens, the price of the same share will come down by 20 points, and the price of the same share will become INR 60.
It happens frequently in the share market due to ownership swapping. Some investors hold the share for a long time until they see some serious issue with the company whereas many just see the share price to decide whether to buy the share or not.
What Does It Mean When You Own A Company’s Stock/Share?
Now we know what exactly is a share of a company means. But, what does it mean to you? What are the benefits or rights you get when you buy shares of a particular company?
As I explained, a share of a company is a small part of the ownership into that company and once you own the shares, you become a shareholder in that company. Investors or people with the highest number of shares run the company and take important decisions.
Since you are one of the owners of the company, you have the similar rights as other shareholders. Therefore, the company will have to share or distribute the company’s net profit with all its shareholder in the form of “Dividend”.
Also, you get the voting rights in the company’s key decisions. Whenever a company hires a new Board Of Directors, Chairman, merging, buyback, or wants to issue additional shares to the public, existing shareholders get the chance to vote. Unless the company gets majority votes in their favor they cannot execute their plans or strategies. Since everything has become digital now, you can expect an email from your company with a link to vote.
Once you own shares of a company, you become one of the owners in that company. Company shares the net profit in the form of Dividend and your vote matters in taking key decisions. It is like being a partner in a company and you want to be the partner with the best companies to stay profitable in the long run.
Therefore, owning shares of a company doesn’t mean only buying and selling shares. You become a partner in that company and as you don’t prefer to invest in businesses that are not profitable in a long run, you should only buy the shares of the company which is fundamentally good and shows good prospects.
Remember, When you are purchasing a share, you are purchasing the part of the ownership in that company. You own the company if you buy all the shares in that company.
Now, the question comes why should we buy the stocks or shares of any company? What are the benefits of buying shares?
Key Advantages Of Buying Shares
Following are the benefits of investing in shares and the reasons to buy shares in a company;
- Best Returns: If you invest in shares of good companies, you can expect the best returns than any other investment. There are shares in the stock market that have multiplied 4 -5 times within 10 years. Fixed return investments like FD is not lucrative investments now due to low-interest rate. Therefore, you should invest a small portal of your investment in shares of the best companies.
- Attractive Dividends: Shareholders of a company are eligible for the dividend and dividend depends on the company’s profit. If the company is making good profits every year then you can expect consistently good dividends (usually 2-4% every year). Also, dividends from the companies are tax-free.
- Bonus: If companies are making good profits and their business is growing consistently then sometimes they issue the bonus shares for its shareholder. Bonus shares means the additional shares for each share you are holding. If the bonus ratio is 1:1 then you will get one additional share against each share. e.g. if you are holding 100 shares of a company then you will get 100 more shares as a bonus.
- Tax-free Long Term Capital Gain: If you are holding shares for more than a year before making a profit then your earning will be considered as Long Term Capital Gain i.e. LTCG and profit will be 100% tax-free. Therefore it is essential to choose a good company’s share and hold for a long time to tax-free profit.
- Voting Rights: As I explained earlier, you become one the of partner in the company in which you have bought the shares. Therefore, you get the equal rights in a vote when a company decides to hire a new Board of Directors, Chairman, Merging, issue additional shares to the public or buyback existing shares in the market. You get attached to the company when you own the shares of that company.
These are the key benefits of owning the stock of a company. However, the return from the share depends on the company’s performance. Therefore take some time to research and analysis stocks before investing in it. Read also–> Shocking Truth About Hidden Gems In Share Market
Following is the power of a good share (credit Google). It has fallen in the last few months due to the global Corona Pandemic crisis.
Key Disadvantages Of Investing In Shares
Investment in the share market is profitable as long as you are investing in the right shares at the right price. If you failed to invest in bad performing share then you might end up in huge losses. Following are the key disadvantages of investing in the share market you should know before buying in share;
- Quick Capital Loss: Returns from the shares fully depend on the company performance. Therefore if you invest in a bad quality company’s share then you might lose big time. Sometimes, the share catches the lower circuit which doesn’t allow you to sell and you have to bear loss until you get the opportunity to sell.
- Fraud in the company: Companies are managed by the board of directors, chairman, and other management and there were times when they were showing misleading financial results to their shareholders. Sometimes they manage to manipulate the company’s financial consideration for a long time and execute internal fraud resulting in damage to the company’s credibility. Such fraud can hammer share prices very badly and can east up all your profit in a single day.
- Returns are not guaranteed: Company’s performance depends on the country’s economical condition, market demands, government policies, and other external factors. Therefore, sometimes even the best fundamental companies don’t perform as it supposed to be. Therefore your returns on the share investments are not guaranteed and you might see your net validation is negative when you need money in an emergency.
Investing in the share market is not like media promote i.e. invest money in the share market and let the money grow by itself without you doing anything. If you want to earn money from the share market then you should work for it.
Give some time in searching for quality stocks, analyzing the company’s past performance and prospects, etc. This way, you will know what you are buying and you will be able to make an informed decision on time to maximize your profit.
The above chart (credit – google finance) is one of the leading banks but due to the management issues, the price is touching an all-time low. Therefore, don’t stick to any stock and come out as soon as you hear some serious issues. Read also–> Does Long Term Investment In Stocks Always Profitable?
Can You Buy Shares In A Company You Work For?
Yes! You can buy shares in the company you work for. In fact, some of the companies reward their employees with the company’s share with some lock-in period.
However, when you buy or sell stocks or shares of your company then you should consider the insider trading window. Since the employees or someone having the company’s confidential information can either buy or sell before the news comes out to the public and book great profits. Such acts results in loss of investor’s confidence and SEBI doesn’t want it.
Therefore if you are someone who has access to the company’s confidential or financial information then you should follow the insider trading guideline to avoid any trouble in the future.
What Happens To Stocks When The Company Goes Bankrupt?
If it happens then it’s a very bad day for you and what will happen to your investment if it depends on the company’s financial situation when they filed bankruptcy. However, the moment company files bankruptcy, your shares become worthless.
First, The company has to liquidate its assets to settle all its creditors, employee’s pending salaries, and the fund house who it owes money too. Compensation sequence follows the following after the company’s asset liquidation;
- First, the bank’s loan settlement will be done with interest.
- Second, the creditors like the debt fund’s amount will be settled from the shares of the company’s asset liquidation.
- Then, the preferential shareholders who holds majority stake in the company will minimize their loses
- At last, the renaming fund will be distributed to shareholders. Shareholders hardly get proper compensation or very less based on the amount of stocks they might have.
When any public i.e. listed company’s bankruptcy announced, shares continue lower circuit for a long time. Being a small shareholder, you hardly get a chance to get out of that lower circuit and end up erasing all the investment. Therefore, stay vigilant about the company you have invested in, and if you see the continuous bad performance, book loss and get out of it.
Remember, never try to catch a falling stock, you never know the real reason or bottom price where it could stop downtrend and start up-trend.
What Happens To Shares You Own When The Company Gets Delisted?
De-listing of a Share means, permanently removing that share form the stock exchange. There are two types of delisting of the share;
- Voluntary delisting – In voluntary delisting, the company itself tries to de-list its shares because promoters of that company wants the full control of the company or any other reasons.
- Delisting By Stock Exchange – Stock exchange has its rule and regulation which each company needs to follow to trade on exchange publically. If the stock exchange observes that, the company is not following its regulation then they decide to delist from the exchange.
If a company voluntarily wants to delist the company from the exchange then they have to offer the floor price (price offer at which company will buy the shares) of the share. If the shareholders are happy with a floor price, they can accept the offer and sell the stock, however, if the shareholder finds the floor price very low and unacceptable then they can decline the offer and they continue to have legal and beneficial ownership and rights over the shares that they own.
Delisting of the share doesn’t happen overnight and shareholders get enough time to share because share prices usually show more price movement.
The company will require to get the promoter’s approval and permission from the stock exchange to initiate the delisting activities. To complete the delisting of a share from the stock exchange, the promoters of that should acquire 90% of the shares.
Therefore, you shouldn’t worry much about the voluntary delisting of a company. If you are fine with the floor price/offer price of the company then go for it and sell your shares to them else keep it until they negotiate with you with a higher offer.
- Who Makes Money in Intraday Trading?
- How NRIs Can Directly Invest In the Indian Stocks?
- Does Long Term Investment In Stocks Always Profitable?
Investing in share market is beneficial if done right else it could eat up all your money in no time. Therefore when you decide to invest in shares of any company, make sure you know about;
- Basics of share which I have explained in this article.
- Understand the company you are thinking to invest in.
- Analyze the company’s fundamentals, past performance, and business plans.
- Buy and Sell at the right time and avoid Intraday trading.
- Invest only in known and good company and don’t waste time in finding hidden gems.
This is all about investing and owning a share of a company. I hope, now you are clear about the meaning of owning shares of a company. Let me know if you have any question, I would love to answer them.