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Shares – Capital Market Instruments

Shares – Capital Market Instruments

Share is a type of security, which signifies ownership in a corporation and represents a claim on the part of the corporation’s assets and earnings. It is a share in the ownership of a company. As one acquires more stock, his or her ownership stake in the company becomes greater.

There are two main types of shares equity shares and preference shares. Equity share usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preference shares generally do not have voting rights, but have a prior preference on assets and earnings of the company than the equity shares. For example, owners of Preference shares receive dividends before equity shareholders and have priority in the event that a company goes bankrupt and is liquidated.

1.Basic Features of Shares :-

1) Being a shareholder of a public company does not mean you have a say in the day-today running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company.

2) Profits are sometimes paid out in the form of dividends. The more shares you own, the larger the portion of the profits you get. In case of bankruptcy and liquidation, you’ll receive what’s left after all the creditors have been paid.

3) Another extremely important feature of share is its limited liability, which means that, as an owner of a share, you are not personally liable if the company is not able to pay its debts. Other companies such as partnerships are set up so that if the partnership goes bankrupt the creditors can come after the partners (shareholders) personally and sell off their house, car, furniture, etc.

Shares – Capital Market Instruments

4) Companies issue shares to raise capital as it does not require the company to pay back the money after a certain time period (other than redeemable preference shares ) or make interest payments continuously. Equity shares can be held by the company till perpetuity.

5) Equity shares are traded on the cash segment of the capital market. The investors in equity shares make money via dividends or through capital appreciation in the price of the shares. Equity shares are very high risk instruments with no guaranteed returns.

There is always a risk of downside in the value of equity investments.

Shares – Capital Market Instruments

6) Shares are traded at market value on stock exchanges. Market Value per share is the current price at which the share is traded. For actively traded stocks (liquid stocks), market price quotations are readily available due to continuous demand and supply for those shares .However for inactive stocks (illiquid stocks) that have very thin markets, prices are very difficult to obtain. Even when obtainable, the information may reflect only the sale of a few shares and not typify the market value of the firm as a whole.

Market value per share of an equity share is generally a function of the expectations of the market about the future earnings of the company and the perceived risk on the part of investors.

Shares – Capital Market Instruments


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