Intro to Shares


Welcome to the chapter on Shares.

Here, we look at Shares and understand their different classifications and types.


Suppose you have a business and you need some capital (say Rs. 10 lakh) for buying new machinery and promotion.

You have a few options to get this money:

  • First, you can put in your savings
  • Second, you can borrow the money from friends and family or the bank
  • Third, you can raise it by selling some share in your business or company

In the first case, you cannot put in your own money indefinitely to grow the business as it reduces your savings. Moreover, you will have only so much savings.

In the second case, you will have to pay interest on the money you borrow. And this interest adds up to a large amount that you will have to repay. Also, borrowing from friends and family brings in its own share of emotional nightmares.

In the third case, you do end up reducing your ownership in the business as you give away part of your share. However, if you realise that 100% of a Rs. 10 lakh business is less than 50% of a Rs. 25-30 lakh enterprise, and you don’t have to repay anyone for the money you raised, then you will appreciate this method of raising funds.

Shares are so called as they represent a share of your business.

If you want a share capital of Rs. 20 lakh for your new company, you can create 2 lakh shares of Rs. 10 or 20 lakh shares of Re. 1 each. This value of a share is called its face value. You can also create shares of face values of Rs. 100 or Rs. 1,000 or even Rs. 2 or Rs. 0.50. There are no restrictions on the face value of your shares unless you are listing your company in the stock exchange.

The total shares represent the Shareholder Equity of your company. Equity since it represents an equitable interest in the company. This is why the shares are also called equity shares or simply equities.

From an accounting perspective, Shareholder Equity refers to the net assets of a company. It represents the amount of money that would be returned to you and the company’s other shareholders if all of the assets were sold off and all of the company’s debt was paid off.

Owning equity shares gives shareholders the right to vote in meetings, move resolutions, and become eligible to receive dividends, and rights share issues or bonus share issues.

Classification of Equity Share Capital

The equity share capital of a company can be classified into Authorised Share Capital, Issued Share Capital, Subscribed Share Capital and Paid-Up Share Capital.

Authorised Share Capital

Authorised share capital is the maximum number of shares that a company can issue. This is mentioned in the documents that form the constitution and rule book of the company – its memorandum of association and its articles of incorporation.

A company can increase or decrease this authorised share capital at its meetings and paying the specified fee to the prescribed authorities such as the Registrar of Companies that registers all the companies.

Issued Share Capital

This is the part of authorised share capital that the company offers to its investors. It can be issued in one batch or in separate batches over several years.

For example, a company with an authorised share capital of say Rs. 2 crore can have Rs. 1.5 crore of issued share capital that it has issued in 3 batches of say Rs. 50 lakh, Rs. 25 lakh and Rs. 75 lakh over the course of 5 years.

Subscribed Share Capital

This is the part of the issued share capital which is subscribed by the shareholder on the issue of the shares. If demand for the company’s shares is low, then investor may subscribe to only a part of the issued share capital. But if demand is high, then the issue is oversubscribed.

In case shares are oversubscribed, the company may issue the shares on a first-come-first-serve basis or a pro-rata basis. In the former case, only the shareholders who were the first to subscribe up to the issued share capital will be allotted the shares. In the latter case, each shareholder who applied will be given a portion of the total shares she subscribed. The portion she gets may depend on how much the shares may have been oversubscribed. For example, if the shares have been oversubscribed by 2 times, then she may be allotted only 50 shares if she had subscribed for 100 shares. (Note: Publicly listed shares follow a more refined version of the second method).

Paid-Up Share Capital

In some cases, the company may not ask its share subscribers to pay the full amount of each share at the beginning of the share offer. So, if the face value of the share is Rs. 10, it may ask the investors to pay only Rs. 5 at first and the rest later. The total amount of share capital that is thus paid-up is called the paid-up share capital.

This is what you see in the financial statements of the company.

Usually, all companies accept the complete payment for the shares at the time of their issue, and so the issued, subscribed and paid capital usually are of the same amounts.

Types of Shares

A company can issue different types of shares. The most common are equity shares, equity shares with differential voting rights, and preference shares.

Equity Shares

Like we have already described, these are the shares with the ownership rights. They are the ones that are traded on the stock market. Holders of these shares are the owners of the company and they are entitled to dividends, voting rights and all other benefits that shareholders have like rights issues and bonus issues. These are also called ordinary shares.

Shares with Differential Voting Rights

As the name suggests, these shares have different voting rights. For instance, one share may carry just 50% of the voting rights of an ordinary share. Usually, the investors are compensated by other means such as higher dividends.

Preference Shares

Owners of preference shares get different benefits such as getting dividends ahead of the equity shareholders. In case of dissolution of the company, they also get prior access to the proceeds before the equity shareholders.

Preference shares get a fixed dividend which is usually decided at the time of allocation and subscription of these shares. Many of these preference shares are converted from debt the company may have raised. Such a debt instrument that offers conversion of the debt into preference shares as a means of repayment is called a debenture.

Specific Types of Equity Share Issues

Sweat Equity

Sweat equity shares are issued to exceptional employees or directors of the company as a reward for the work they have done.

Rights Issue

In a rights issue, new shares are issued only to existing shareholders in a specific ratio to the shares owned by them. The rights issues are usually done at a lower price to the market price and can be seen as a way of dividend as it reduces the average cost of the shares held by the investor.

The rights issue is used by the company to raise money from existing shareholders by giving them a reward of sorts for being the company’s shareholders.

Bonus Issue

Bonus shares are additional shares given to the current shareholders without any additional cost. The number of bonus shares you get is based upon the number of shares that you already own.

Bonus shares are a way for the company to issue dividend without having to hand over any cash to the shareholders as dividend.

Stock Split

In a stock split, a company divides its existing shares into multiple shares. This is usually done to boost the liquidity of the shares for the retail investor. For example, if the share price of the company in the stock exchange is very high making unaffordable for the small investor, then a stock split will help it become more accessible.

Reverse Stock Split

In a reverse stock split, a company merges 2 or 3 shares into a single share. This may be done to increase a low share price and make it more attractive to the investor. It may also be done to counter a low share price that has increased the risk of the company being delisted from the stock exchange.

Mechanism of Share Trading

The securities and commodity market in India is regulated by the Securities and Exchange Board of India (SEBI), and it has laid down specific guidelines for shares to be traded in the stock market.

For a company’s shares to be available for trading, they need to be first offered to the public through an Initial Public Offering (IPO). Here the company follows a certain procedure to get listed in the stock market.  

Once the IPO is over and shares have been allotted, these shares can be bought and sold by investors in the stock exchange. This market where the buying and selling happens after the IPO is called the secondary market or open market.

Anyone with a demat and a trading account can buy and sell the shares in the open market.

Demat and Trading Accounts

All publicly listed shares in India are available in a dematerialised format. This means you do not get a physical share certificate, but rather an online list of the shares you own. These shares are called demat shares and are held with a depository.  

The depository is responsible for holding your securities in an electronic form. Currently, there are two depositories registered with SEBI. They are:

  • National Securities Depository Ltd. (NSDL)
  • Central Depository Services (India) Ltd. (CDSL)

The depositories, in turn, have allocated the responsibility of holding the securities of a shareholder in electronic format to registered Depository Participants (DPs).

You can open a demat account with a DP.

And once you have a demat account to keep your securities in electronic format, you can open a trading account with a securities broker. This is the account that you will use to buy and sell the securities.

Usually, the process of opening both the demat and the trading accounts are taken care of by the broker.

Once both the accounts are set up and the trading account is linked to your bank account for money transfers (to buy securities and to receive the money after the sale of securities), you can start to buy and sell shares and other securities.