What do equity shares actually mean?

Imagine you wanted to start a retail store with members of your family. You decide you need INR 1,00,000 to get the business started, so you incorporate a new company, for the sake of simplicity lets call the company as 'X' company. All family members invest a portion of their saving in the 'X' company. Thus, each of the member an owner of the business as well.

To give people the right equal to their investment proportion in 'X' company, all were issued shares, a certificate stating that you are among the owner of the company, and the value of each share was fixed at INR 10. This would mean that 1,00,000/10 = 10,000 shares.

This effectively means, that if some one by the name Ram had invested INR 50,000 then Ram is entitled to 5,000 shares (50,0000/10).

Each shareholder will have to share the profits and losses in the proportion of their holding.

Therefore, shares, is an instrument which gives the holder the ownership to the company in proportion to their holding.

Taking this further. 

If the company earned INR 50,000 after taxes during its first year. Therefore, each share will be entitled to a profit of -

profit after tax/(number of shares) 

i.e. INR 50,000/10,000 = INR 5 per share Also known as earnings per share.

This profit earned can be reinvested to expand, or distributed as cash dividend among the shareholders, or the company can go for buyback of its shares; it can also use a combination of the options explained. 

If the company can fulfill the criteria required to be listed on the stock exchange then after following the due processes it can becomes a listed company, such company is also called publicly traded company. 

This process of listing the shares in the stock exchange is called Initial Public Offer (IPO). The same can be restated as, the process of making the shares available for interested investors to own, by means of purchasing it on the stock exchange is through the IPO.

For a public traded company, the shares can be bought and sold on the stock exchange where they are listed. This trading of shares is done through a broker. When you are purchasing and selling a share, the broker tries to match someone with whom the transaction takes place. For this they charge a commission, and fees, commonly known as brokerage charges.

OneIndia Money

Read more about: shares, ipo, nse, bse, buyback
Story first published: Saturday, April 9, 2011, 15:31 [IST]
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