Understanding ‘Stocks’ or ‘Equity Shares’
A share of stock also referred as ‘equity share’ represents a limited liability share of ownership in a company. The persons or institutions who own such stocks are called shareholders of the company. Stocks are generally issued by the companies generally through initial public offerings (IPOs) in the primary market in order to raise the funds or capital to expand the business operations of the company. Even a small share of the company will give the investors the right have a say in how the company is run. Although they gain a portion of the company’s profits, investors do not carry an obligation to the company in cases of defaults or lawsuits.
Stocks are issued by companies to raise capital. A cash injection is needed for either property acquisition or company expansion. Every stock is limited to a particular number of shares. The growth potential and the compititive advantage of the company influences the market adjustment of the value of the stocks.
Investors buy stocks with the belief that the company will grow continuously and hense raise the value of their shares. The market value of the share is usually influenced such factors as the earnings potential, growth potential and the company’s future prospoects. Because of this, investing in well established companies is considered to be safer than investing in new ventures. This is because in case of established companies the factors such as market conditions, compitition and growth potential will be well understood.
Only those companies which are listed on public exchanges like NSE and BSE are capable of stock trading. The shares from the companies listed on public exchanges can be bought and sold on the open market. Buying a partial ownership in smaller companies that are not listed on a stock exchange is also possible but that is a very different type of investment.
An individual investor hires a broker or a brokerage firm to make transactions for him. A broker or a brokerage firm takes orders and instructions from the investor regarding the buying or the selling of stocks. These orders may include some specific instructions to trade at a price that the market will bear or at a price that the investor will prefer. The broker then tries to execute the investor’s orders by searching for either a buyer or a seller. The broker receives a commission on the sale.
Stocks have a lot of advantages over savings investments because they represent ownerships in a particular company. This gives the investor a certain right to participate in making decisions for the company. Some important company matters require voting and one stock is equivalent to a single vote. Partial company ownership also allows the stockholders to benefit from the company’s profits which are distributed in the form of dividends.
A growing company causes the value of the stocks and the profits to increase while a shrinking company causes the value of the stocks and the profits to decrease. Stocks, when compared with savings investments, both carry a higher risk of losing money and a higher potential of earning money. A good knowledge of the different stock markets and the various investment strategies can help investors to minimize their losses.
