What is a Share? Meaning, Types & How Shareholding Works

Share investment involves the buying of shares of any business to make money. The value of your shares will also increase as the company grows, and the price at which you sell them will be higher.

Example:

Ankit is an investor, and he invested in shares worth ₹5,00,000. He also made his friends familiar with share investing. It can be simply summarised as the following:

Key Points:
 

1. Ankit invested ₹5,00,000 in shares.
    
2. He bought 5,000 shares at ₹100 each.
    
3. He shared his knowledge with 10 friends.
    
4. If share prices rise, Ankit earns a profit.
    
5. If prices fall, he may lose money.

Buying shares can be profitable, but it includes risk. Ankit’s story shows how it works in simple terms.

Different Types of Shares

Shares are ownership of a company, and we have two main types of shares: ordinary shares and preference shares. Ordinary shares give voting rights but no fixed dividends, and preference shares offer to pay a fixed percentage of dividends (no voting rights).

Example:

Ankit invested in ₹5,00,000 ordinary shares and ₹4,00,000 in preference shares. These are the ways they work:

Key Points:
 

1. Ordinary Shares: Ankit owns part of the company, can vote, but receives no dividends.
    
2. Preference Shares: Ankit gets fixed dividends but no voting rights.
    
3. Higher Risk: Ordinary shares can give big profits or losses.
    
4. Lower Risk: Preference shares provide growth but smaller returns.

Read More – What is Share Capital? Meaning, Types & Role in Company Funding
 

Ankit has a balanced risk and reward approach by investing in both types of shares.

( What is Voting Rights: “The right of a shareholder of a corporation to vote on corporate matters of policy is called a voting right.”)

How Shareholding Works?

Shareholding is the process of purchasing the shares of a company and becoming an owner of part of it. The shareholders can realise the profit in the form of dividends or by selling the shares at a higher price.

Example:

Ankit purchased shares of the ordinary shares and preference shares of XYZ Company to the tune of ₹5,00,000 and ₹4,00,000, respectively. This is how ownership works:

Key Points:
 

1. Ownership: Ankit owns 0.5% of XYZ Company (if total shares = ₹10 Cr).
    
2. Dividends:
   • Ordinary: ₹25,000 (if XYZ declares 5% dividend).
   • Preference: ₹20,000 (fixed 5% yearly).
      
3. Voting Power: Ankit can vote in shareholder meetings for ordinary shares.
    
4. Liquidation: If XYZ shuts down, preference shareholders get the invested amount.
    
5. Selling Shares: Ankit can sell at the market price (profit/loss depends on demand).

Ankit can earn money from dividends, and if the share price grows, balancing the risk is the Art of the Share market. So, invested in both types of shares.

Benefits of Owning Shares

Buying shares means becoming a partial owner of a firm that has the potential to make profits. The main advantages are dividends, capital growth and ownership rights.

Example:

Ankit has invested ₹5,00,000 in ordinary shares and ₹4,00,000 in preference shares. In 5 years, the following is how he benefited:

Key Points:
 

1. Dividends: Ordinary shares paid ₹1,50,000 (variable), preference paid ₹2,00,000 (fixed).
    
2. Growth: Ordinary shares grew 50% (₹5,00,000 to ₹7,50,000), preference shares grew at a regular rate.
    
3. Total Value: Combined investment grew from ₹9,00,000 to ₹18,50,000 in 5 years.
    
4. Ownership: Only ordinary shares gave voting power in company decisions.
    
5. Flexibility: Ankit can sell ordinary shares anytime for profit according to his preference.

Shares allowed Ankit to grow money through both consistency (dividends) and long-term growth in value.

Also Read  -How to Buy Shares – Beginner’s Step-by-Step Guide

Risks of Investing in Shares

Risk is an essential part of the Share Market. Investing has the potential to increase your money, but it still comes with risk.

Example:

Ankit has invested ₹9,00,000 (₹5,00,000 ordinary shares + 4,00,000 preference shares). The following were these risks:

Key Risks Ankit Faced:
 

1. Market Crash: His ₹5,00,000 ordinary shares dropped to ₹3,50,000 (30% loss).
    
2. No Dividends: The Company skipped dividends for 2 years during losses.
    
3. Selling Problem: Took 3 months to sell shares during a bad market
    
4. Company Trouble: If the company failed, he would lose all ordinary share value.
    
5. Recovery Time: It took 2 years for shares to recover their value.

Share price can fall quickly, so investors like Ankit must be prepared for ups and downs.

Conclusion

The journey of Ankit as an investor shows the benefits and the risks of investing in shares. When he invested ₹5,00,000 in ordinary stock and ₹4,00,000 in preference stock, he experienced the effect of the market in his good times. His ordinary stock grew 50% during good times but dropped 30% in a crisis, but the preference stock was solid (with a smaller gain). 

Ankit quickly discovered that shares could be used to generate wealth in the form of dividends as well as an increased price, and could equally drop in value over five years. The most important lessons are: diversification can assist (mixed ordinary shares and preference shares), time is essential (wait for the market to drop before investing), and an appreciation of risk plays a major role. 

Although Ankit experienced an increase in his total investment in the long run, he trusted our research and invested in hard times when his investments became smaller. This true story shows that investing in shares requires having faith in growth and preparation for volatility.

FAQs

What are shares?
Shares are small pieces of a company that you can buy to own a portion of that business.

How do I make money from shares?
You earn through dividends (company profit sharing) or by selling shares at a higher price than you bought them.

What's the difference between ordinary and preference shares?
Ordinary shares give voting rights but variable dividends, while preference shares offer fixed dividends but no voting power.

Is my money safe in shares?
No investment is completely safe; share values can go up or down based on company performance and market conditions.

How much money do I need to start?
You can start with as little as ₹500-₹1,000 through many online platforms.

Can I lose all my money?
Yes, if a company goes bankrupt, preference shareholders get paid before ordinary shareholders.

How long should I hold shares?
Most experts suggest at least 3-5 years to ride out market ups and downs.

Do I pay taxes on share profits?
Yes - 15% on short-term (under 1 year) gains and 10% on long-term gains over ₹1,00,000.

How often do I get dividends?
It varies; some companies pay quarterly, others annually, and some may not pay at all.

Where can I buy shares?
Through stockbrokers, online trading platforms, or some bank investment services.

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We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?