Stock or a Share of company simply means a part of ownership held by the stockholder. Whenever a company wants to expand his operations or want to grow further, the company divides its ownership into smaller pieces which is called shares and these shares are issued to public with the help of IPO.
Firstly, in a stock market there must be buyer (willing to buy an ownership) and a seller (willing to sell his ownership) and these buyers and sellers trade in previously issued share. The shares of a company are traded in the market i.e. NSE and BSE, the individual which think that the company has better future prospectus then he buys the share and another individual who thinks that the company is not performing well then he sell the share.
How share price is determined?
Share price is determined by the supply and demand of the share. When demand is greater than supply then the share price goes up and vice versa.
How profit is being made in stock market?
Profit can be made in two ways:
- If an investor thinks that the price of share is undervalued so he can buy at a lower and sell at a higher price.
- If an investor thinks that the price of the share is overvalued so he can go for short selling. Short selling means selling at higher price and buying at a lower price.
Share basically is a share in a share capital of a public limited company. It entitles the owner or the holder to an equal claim on company’s profits and an equal obligation in company’s debts and losses. The distribution of shares in a company indicates the distribution of ownership in the company. There are two types of shares 1) Ordinary or Common Stocks and 2) Preferred stock. Ordinary Stocks are not issued with fixed dividend policy whereas preferred stocks are issued with fixed dividend policy. As a result the risk in ordinary shares is high and the returns opportunity is also high.
The Importance of Share Capital
It acts as portal for businesses to obtain money from investors to meet their capital requirements. These capital requirements can be for operational, strategic or investment reasons. It provides organizations with long term capital which they have to payback only at the time of winding up of the company. It acts as a cushion for the debtors of the company. As there are higher risks or investors investing in shares, the cost of equity is therefore more than cost of debt.
A shareholder buys share so as to invest in company and grow as company grows as the share prices increase in markets. Shareholders seek long term capital gains as their company grows in time.