What are Shares?

Hello friends,Today i will tell you 

What are Shares?

Imagine you own a sports goods business which is working well as you are the only one who has put in all the money in the business you will be solely enjoying all the profits and you will be only suffering from the losses and this is known as a Sole Proprietorship and the money you added in the start of the business is known as Capital.

As your Sports goods business is working very well and you want to expand your business in your local area for this you will need more Capital.So in order to obtain the Capital you invite your friends to join in your company now you all will be sharing all the profits and the losses as per your Capital Investment and now your business will be known as a Partnership Firm.

Well the business started booming and now you want to expand in some other cities and inviting more of your friends didn't seem to be an option now.So you started looking for the other methods to bring in the capital to expand your business.Now can you ask the general public for their money.Well you can't go door-to-door to ask the money from the public and this is were shares come into picture.Now in order to issue these shares it is important to register the Partnership Firm as a company you issue the shares of your company and the general public buys them and they become part owners of your company and they are called as Share Holders

Now what exactly is a Share.

Share is the smallest unit of the capital of the company.

When you buy shares of a company you will receive a share certificate with the value of share name of the company and various other details printed on it.The printed value of the share is known as the Face Value or the Nominal Value or the Par Value or The Printed Value.

Face Value of a share never changes.

If you all must have observed on the tv screens small Green and Red triangles telling us the Hike or Drop in the share prices and this change as per the performance of the company but as we just said that face value never changes then the value that keeps changing is known as the Market Value of the share price at which the shares are sold or bought is called as the Market Value now as you have bought some shares of a company you will be known as the Shareholder of the company and every shareholder is a part owner of the company 

Now imagine your Sports goods company issues 100 000 shares in the month of january 2017 with the face value of each share as 10 rupees.Now you issued these shares to 1000 people so each person will get how many shares 100 right as total number of shares divided by total number of people and the total sum collected by the Company will be number of shares multiplied by the face value which will give us 10 lakh rupees this is the total capital value that your company will be receiving from these issued shares.Now in december 2017 your company makes a profit of 200 000 rupees.Here the total value of the company will be 12 lakh rupees now as each shareholder is an owner of the company each of them also deserves to get a part of the profit too.

Right,so the company announces dividend at 10 now this 10 is mutually decided by the shareholders and the board of directors now on each share.Each shareholder will get 10 percent of the face value that is 10 rupees.Which will become 1 rupee per share as there are total 100 000 shares a total sum of hundred thousand will be distributed as the dividend to the shareholders

If 100 000 rupees is distributed then the total value of the company will be reduced from 12 lakhs to 11 lakhs now the market value of each share is 11 rupees but the face value of each of the share remains the same that is 10 rupees

Now at the end of 2018 the company makes a profit of 500 000 rupees and announces a dividend at the rate of 15.Now here the total value of the company will be 11 lakhs+5 lakhs which becomes 16 lakh rupees.So here each shareholder will get 1.5 rupees on each share

Are you confused?

Why did we calculate dividend on 10 rupees and not on 11 rupees then 11 rupees is the current market value of the share please remember dividend is always calculated on the face value of the share and not on the market value of the share since the company has given a dividend of 1 lakh 50 000 what will be the total Capital from the shares of the company now.Yes 14 lakh 50000 and the market value of each share will be 14.5 rupees.

Now in the middle of 2019 the company faces a loss of 6 lakh rupees.So will there be any dividend that will be announced by the company? No right as dividend is always announced only when the company makes a profit

Now what is the total value of the company now it will be reduced from 14 lakhs 50 000 to 8 lakh 50 000 right.

Now the market value of each shared is 8.5 rupees.But will this affect the face value of the share?

No the face value of the share will still remain 10 rupees whether the company is in profit or in-laws

So in here till now we have learned three scenarios in total

The First Situation:The company has just launched its shares where face value is equal to the market value.If you buy shares at this point you have bought shares at par in second and third situation company makes a profit and the market value of the shares is higher than that of the face value

If you buy the shares from some other shareholders at this situation you have bought the shares at premium in the fourth situation company made a loss and the market value of the shares is dropped

Then compared to the face value and if you buy the shares at this time you will be buying the shares at a discounted price

Well i hope you have understood what exactly shares at par premium and discount means.

Thanks for Reading