Lesson 2: Understanding Shares, Ownership and How Companies Raise Money
Before you buy your first share, you need to understand what you're actually buying. A share isn't just a number on your screen or a piece of paper—it represents real ownership in a real company. When Reliance Industries or Tata Motors needs money to expand, build new factories, or develop new products, they don't just go to a bank. They often turn to people like you by selling shares. This lesson will help you understand what shares are, why companies issue them, and what it means for you as an investor.
What Exactly Is a Share?
A share (also called equity or stock) is a unit of ownership in a company. When a company divides its ownership into small, equal parts and sells these parts to the public, each part is called a share. If you own shares in a company, you are a shareholder—a part-owner of that business.
Let's say a company's total value is ₹1 crore, and it divides this into 1 lakh shares. Each share would represent 1/1,00,000th of the company. If you buy 100 shares, you own 0.1% of that company. Your ownership is small, but it's real. You have a claim on the company's assets and earnings proportional to the number of shares you hold.
Why Do Companies Issue Shares?
Companies need money to grow. They have three main ways to raise capital:
- Borrowing from banks: This creates debt that must be repaid with interest
- Reinvesting profits: This works only if the company is already profitable and has surplus cash
- Selling shares to investors: This brings in money without creating debt
When a company sells shares for the first time to the public, it's called an Initial Public Offering (IPO). For example, when Zomato came to the stock market in July 2021, it raised ₹9,375 crore by selling shares to investors. This money helped Zomato expand its business, invest in technology, and compete better. In return, investors became part-owners and could potentially benefit if Zomato grew and became more valuable.
After the IPO, these shares are traded on stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Once a company is listed, it can raise more money in the future through additional share offerings, but most daily trading involves investors buying and selling shares among themselves, not from the company directly.
Primary Market vs. Secondary Market
It's crucial to understand where your money goes when you buy shares:
Primary Market: This is where companies sell new shares directly to investors, usually through an IPO or a Follow-on Public Offer (FPO). When you apply for shares in an IPO, your money goes directly to the company. You're helping the company raise capital.
Secondary Market: This is where investors trade shares among themselves. The NSE and BSE are secondary markets. When you buy 10 shares of Infosys on the NSE at 9:30 AM, you're buying them from another investor who wants to sell, not from Infosys itself. The company doesn't receive your money—the seller does. This is where most of your trading activity will happen.
How Do You Make Money from Shares?
As a shareholder, you can earn returns in two ways:
Capital Appreciation: This is when the share price increases. If you buy a share of HDFC Bank at ₹1,500 and sell it later at ₹1,700, you make ₹200 per share as profit (before taxes and charges). This is the most common way retail investors aim to make money.
Dividends: Some companies share their profits with shareholders by paying dividends—usually a few rupees per share. For example, if you own 100 shares of a company and it declares a dividend of ₹5 per share, you receive ₹500. Not all companies pay dividends regularly; many younger, growth-focused companies reinvest all profits back into the business.
What Rights Do Shareholders Have?
As a shareholder, you're not just a spectator. You have certain rights:
- Voting rights: You can vote on important company decisions at Annual General Meetings (AGMs), though your influence depends on how many shares you own
- Right to information: Companies must share quarterly financial results and annual reports with all shareholders
- Right to dividends: If the company declares dividends, you're entitled to your share
- Claim on assets: If a company shuts down and sells its assets, shareholders have a claim on whatever remains after all debts are paid (though equity shareholders are last in line)
Face Value vs. Market Price
Every share has a face value (also called par value)—this is the nominal value assigned when the share is created, often ₹1, ₹2, ₹5, or ₹10. This number has little practical importance for investors.
What matters is the market price—what people are willing to pay for the share right now on the stock exchange. A share with a face value of ₹2 might trade at ₹850 or ₹3,200, depending on how investors value the company.
Key Takeaways
- A share represents partial ownership in a company; when you buy shares, you become a part-owner with rights and potential rewards
- Companies issue shares to raise money without taking on debt, first through IPOs (primary market) and then shares trade among investors on exchanges (secondary market)
- You can make money through capital appreciation (selling at a higher price) or dividends (profit sharing), or both
- The market price of a share has nothing to do with its face value; it reflects what investors believe the company is worth today
- Ownership comes with rights including voting, receiving information, and claiming dividends when declared