What are Shares?
To start a business, there are many requirements such as product/service idea(s), an operational facility, and people to work, etc. All these activities imply that the company needs money or ‘capital’. Companies raise this capital mainly in two ways:
· Borrowings
· Raising money from investors by selling them a stake (issuing shares of stock) in the company
The second method of raising money is how stocks come into existence.
A share of stock is literally a share in the ownership of a company. When you buy a share of stock, you are entitled to a small fraction of the assets and earnings of that company. The assets include everything the company owns (buildings, equipment, trademarks), and earnings are all the money the company brings in from selling its products and services.
All public limited companies are started privately by a promoter or a group of promoters. But often, the promoters’ capital and the borrowings from banks and financial institutions are not sufficient to finance a project or set up a business. So, these companies invite the public to contribute towards equity and issue shares to these individual investors through an Initial Public Offer (IPO).
Shares bought through an IPO issue are again traded by investors in what is called the secondary market. The secondary markets are generally called the ‘share market’.
The share market is like any other market, wherein prices are determined by the forces of demand and supply. Demand refers to how many people want to buy something and how much they are prepared to pay for it. Supply refers to how many people are prepared to sell something and the price they want for it.
Why do people buy shares? If you look at the long-term history of the markets over long time horizons, stocks have provided consistent returns. Stocks in general have been solid investments. This is to say that as the economy has grown, so have corporate earnings, and stock prices are linked to the performance of the company in the long run. There is, however, no guarantee that the share value will appreciate or that there will be dividends. In a particular period, there may be appreciation and/or dividends, and in another, investors may get only one of them or neither of them.
Click here to know what are the Stock markets.
This article was shared by Dalal Street Investment Journal to IFIM B School