Shares are the equity ownership owned by an investor in a financial asset. Investing in shares has been so popular because it enhances long-term wealth and helps in meeting different financial goals. An investor can buy a small part of a firm for achieving future profits. These investors can exchange capital in return for the units they own.

 

When an individual or company owns a unit or stock, then they are called shareholders. They have the ability to vote on a company’s major decisions and be a part of its gains and losses.

Types of Shares

All companies, from small scale to multinational companies, offer common shares or preferred shares. 

  • Equity Shares- Equity shares are also called common shares owned by a company for long-term financing sources. The investors own a financial asset or share in anticipation of future profits. These investors are called a shareholder and have voting rights and receive profits from the company in the form of a dividend.

When the supply (selling) of the company increases, the share decreases, and if the demand increases (buying), the shares increases. Equity shares are further classified as.

  • Right shares– These shares are provided to the premium existing investors at a discount before trading in the stock market. The share is only sold for a defined period to increase the finances and meet the expenditure that occurred.
  • Bonus shares- When the company earns a profit, they provide additional stocks to the existing investors free of cost, like a bonus, but this does not increase the total capitalisation of the firm.
  • Voting and non-voting shares- As most companies issue the voting rights to the shareholders, they can also make an exception by giving differential or zero voting rights.
  • Sweat Equity Shares- If the investor has made a significant contribution to the finances of the firm, then the company can reward the investor with sweat equity shares.
  • Preference Shares-These shares are distributed among the ordinary shareholders, and the company offers preference to the shareholders over equity shareholders. Preference shareholders do not have voting rights, and they get paid before equity shareholders.
  • Redeemable/irredeemable- In these shares, the company can repurchase or claim a redeemable preference share at a defined time and price. This is not applied to irredeemables.
  • Participating/non-participating- After payment of dividends, the company gives a bonus profit to participating preference shareholders but not for non-participating.
  • Cumulative/non-cumulative- In cumulative preference shares, the company carries forward the benefits of the annual dividend to the next financial year if it’s not declared but not in non-cumulative preference shares.
  • Convertible/non-convertible- In convertible shares, the shares can be converted into equity shares as per the obligations of the company’s Article of Association but not for non-convertible preference shares.

Shareholder’s Equity

Shareholder’s equity is also called share capital, and it is issued after the company’s debts have been settled. This claims the investor’s ownership of the company’s assets. Shareholder’s equity plays an important role in managing the company’s financial fitness and helps the investors to know about the company’s efficient economic health.

It is calculated by-.

Shareholder’s equity = Total Assets -Total liabilities

Components of Shareholder’s equity-

  1. Retained earnings- These earnings are retained from the company’s profit instead of being sold to shareholders as dividends. This earning can be used to reinvest in an asset or to pay off the debt of the company. 
  2. Outstanding Shares- These shares include shares that are sold to inhouse stockholders like company officers, company insiders and the likes. These shares cannot be repurchased.
  3. Treasury stock- The company sometimes accumulates the stock in treasury for future purposes and repurchases it from the investors. They sell it at a later date to increase the capital.

Intellectual property

Intellectual property is an important asset a company has, and valuing intellectual property rights is difficult. The exchange of equity ownership to a company means valuing laws concerned with transfer and tax consequences.

 

The IPR sections concerning Share capital are-

  1. Right issues (Section 62 Companies Act)- Direct offer of shares to existing shareholders in proportion to the current shares they are holding.
  2. Employee Stock Option Plan [Section 62(1)]- The right of the company’s officers, staff and directors to purchase the shares at a predefined price.
  3. Sweat Equity Shares [Section 54(1)]- Providing the equity shares to the company’s directors or employees at a reasonable price or discount.
  4. Preferential Issues [Section 62(1)c]- In this offer, the company can issue shares to a person or group of people on a preferential basis.

Conclusion

Investment in equity shares is one of the emerging options for generating good wealth and improving one’s financial matters. But it is necessary for investors to study well before investing in any stock. The proper knowledge of fundamental stocks and narrowing down on the trustworthy and reliable financial market. The shareholders should know about the relevant factors affecting the equities to get an idea about a company’s financial standing.The correct way to create good wealth is to select the right stock and the skill to mitigate the risks and invest in them.