Shares
Imagine a company not merely as a business entity, but as a collective ownership structure. Instead of a single individual owning the entire company, ownership can be divided into many small units. These units are called shares.
Meaning of Shares
A share (or stock) represents a unit of ownership in a company.
When a person buys shares of a company, they become a shareholder, meaning they own a small portion of that company. Ownership gives two important rights:
(1) Share in Profits
If the company earns profits, shareholders are entitled to a portion of those profits.
(2) Voting Rights
Shareholders can participate in the decision-making process of the company through voting at shareholder meetings (such as Annual General Meetings).
In simple words:
Buying shares means becoming a part-owner of a company.
This is why companies that issue shares to the public are often called public limited companies.
Why Companies Issue Shares
Companies require funds for many purposes such as:
- Expanding business operations
- Building factories
- Investing in technology
- Paying debts
- Entering new markets
Instead of borrowing money from banks, a company may decide to raise capital from the public. It does this by issuing shares in the capital market, allowing investors to purchase ownership in the company.
These shares are later traded on the stock market, where investors can buy or sell them.
The price of shares is not fixed permanently. It keeps changing due to factors such as:
- Demand and supply in the market
- Company’s financial performance
- Industry trends
- Investor expectations
- Economic conditions
Understanding Through a Simple Example
Suppose a company called XYZ Ltd. divides its ownership into 100 shares.
If you purchase 10 shares, then:
- You own 10% of the company.
- You are entitled to 10% of the profits distributed to shareholders.
- You may have voting rights in shareholder meetings.
Now consider two possible situations:
Scenario 1: Company Performs Well
If the company’s profits increase, investors expect higher returns. Demand for the company’s shares rises, and the share price increases.
You may then sell your shares at a higher price, earning a capital gain.
Scenario 2: Company Performs Poorly
If profits decline, investor confidence falls and the share price drops.
If you sell your shares then, you may incur a capital loss.
Thus, investing in shares carries both potential rewards and risks.
Types of Shares
In corporate finance, shares are broadly classified into two main categories.
(A) Equity Shares (Ordinary Shares)
Equity shares represent true ownership in the company.
Key Characteristics
- Voting Rights
Equity shareholders can vote on important corporate decisions. - Variable Dividend
They receive dividends only after preference shareholders are paid, and the dividend amount is not fixed. - Higher Risk and Higher Return
Since their returns depend on company performance, equity shareholders face greater risk but also have the potential for higher returns. - Residual Claim
In case of company liquidation, equity shareholders receive payment after all creditors and preference shareholders are paid.
Because of these features, equity shareholders are often called residual owners of the company.
(B) Preference Shares
Preference shares combine features of equity and debt instruments. They are called “preference” shares because these shareholders receive priority treatment.
Key Characteristics
- Fixed Dividend
Preference shareholders receive dividends at a pre-determined rate. - Priority in Dividend Payment
Their dividends are paid before equity shareholders receive any dividend. - Priority During Liquidation
If the company is dissolved, preference shareholders are repaid before equity shareholders. - Usually No Voting Rights
Preference shareholders generally do not participate in company management decisions.
Because of these characteristics, preference shares are usually preferred by risk-averse investors seeking stable income.
Different Classes of Shares
Companies may also issue different classes of shares depending on their financing strategy.
Examples include:
- Non-voting shares
- Shares with limited voting rights
- Differential voting rights (DVR) shares
These variations allow companies to raise funds without significantly diluting control.
Stock Valuation
Whenever investors try to judge whether a stock is worth buying, they look for ways to estimate its true worth. But here lies the complexity: the “value” of a share is not a single fixed number.
Instead, economists and financial analysts look at three different indicators:
- Face Value – the nominal value assigned by the company
- Book Value – the accounting value based on assets and liabilities
- Market Value – the price determined by the stock market
Think of these as three perspectives on the same company:
- One comes from company records
- One comes from accounting fundamentals
- One comes from market perception
Understanding all three allows investors to assess the financial health and valuation of a company.
Let us begin with the simplest one.
Face Value (Par Value)
Face Value, also known as Par Value, is the nominal value assigned to a share when the company issues it for the first time. It is essentially the official base value of a share, recorded in the company’s financial documents.
In India, companies usually issue shares with face values such as ₹1, ₹5, ₹10. This value appears in company balance sheets, share certificates and official filings with stock exchanges.
However, an important point must be understood:
Face value is NOT the price at which investors buy the stock in the market. It is mainly used for legal and accounting purposes.
Why Face Value Matters
Face value is used in several corporate calculations:
1. Dividend Calculation
Companies often declare dividends as a percentage of face value.
Example: Face Value = ₹10, Dividend declared = 20%. So, Dividend paid = ₹2 per share.
2. Determining Share Capital
The total share capital of a company is calculated using face value.
Example: If a company has 1 crore shares; Face value = ₹10, then, Share Capital = ₹10 crore.
3. Stock Splits and Reverse Splits
Face value generally remains constant, but it may change during
→ Stock split (face value decreases)
→ Reverse split (face value increases)
Thus, face value acts as the starting point in the life of a share.
Book Value (Intrinsic Accounting Value)
While face value is fixed at issuance, Book Value reflects the actual financial strength of the company. Book value represents the net asset value of a company—that is, the value left for shareholders after all liabilities are paid.
In simple terms:
Book value shows how much each shareholder would theoretically receive if the company were liquidated today.
Formula for Book Value per Share
Book Value per Share = (Total Assets – Total Liabilities)/ Total Number of Shares
Example
Suppose a company has:
- Total assets = ₹700 crore
- Total liabilities = ₹200 crore
Net assets = ₹500 crore. If the company has 10 crore shares, then:
Book Value per Share = ₹50.
This means that each share represents ₹50 worth of net assets.
Why Book Value Changes
Unlike face value, book value changes over time because it depends on the company’s financial performance.
It may change due to → profits earned by the company, retained earnings, losses incurred and asset revaluation
Therefore, book value gives investors insight into the balance sheet strength of the company.
Many value investors compare Book Value and Market Price to determine whether a stock is undervalued or overvalued.
Market Value (Market Price)
Now we come to the most dynamic component — Market Value.
Market value is the price at which a share is currently traded in the stock market.
This is the price you see when you open a trading platform or stock ticker.
Unlike face value or book value, market value constantly fluctuates because it is determined by demand and supply in the stock market.
Factors Influencing Market Value
Several factors determine the market price of a share:
- Company performance
- Profit growth and earnings outlook
- Investor sentiment
- Demand and supply in the stock market
- Broader economic conditions
Thus, market value reflects investor expectations about the future.
Market Capitalisation
When we multiply the share price with the number of shares, we obtain the Market Capitalisation of the company.
Formula:
Market Capitalisation = Current Share Price × Total Outstanding Shares
Example:
- Share price = ₹900
- Total shares = 10 crore
Market Capitalisation = ₹9000 crore.
Market value can change daily, hourly, or even every second depending on trading activity.
Key Differences Between Face Value, Book Value and Market Value
These three values differ in meaning, determination, and frequency of change.
| Parameter | Face Value | Book Value | Market Value |
|---|---|---|---|
| Meaning | Nominal value assigned when shares are issued | Net worth per share (Assets – Liabilities) | Current trading price of the share |
| Determined by | Company at the time of issue | Accounting records | Market forces |
| Frequency of change | Rare (only during stock splits) | Changes periodically | Changes constantly |
| Purpose | Dividend calculation and share capital | Financial analysis | Trading and market capitalisation |
A Simple Analogy to Understand the Three Values
Think of a house.
- Face Value → the price written on the original property registration document.
- Book Value → the actual value of the house based on construction cost and assets.
- Market Value → the price buyers are willing to pay today.
The same logic applies to shares.
Dividend: Distribution of Profits
Now let us understand the concept of dividend, which is directly linked to share ownership. A dividend is the portion of a company’s profits distributed to its shareholders.
When a company earns profit, it has two choices:
- Retain the profit within the company for future expansion (called retained earnings), or
- Distribute part of the profit to shareholders in the form of dividends.
Companies usually declare dividends at regular intervals such as → Quarterly, Half-yearly or, Annually
The declaration of dividend is typically approved by the Board of Directors and ratified by shareholders.
How Dividend is Calculated
Dividends are usually paid per share.
Let us take a simple example.
Suppose a company declares a dividend of ₹5 per share. If a shareholder owns 100 shares, the dividend received will be:
Dividend = 5 × 100 = ₹500
Thus, the more shares a person owns, the higher the dividend income they receive.
A Broader Perspective
Shares play a crucial role in the capital market, especially in the primary market where companies raise fresh capital through instruments like Initial Public Offerings (IPO).
Through the issuance of shares:
- Companies obtain funds for growth.
- Investors get an opportunity to participate in economic development.
- Financial markets facilitate efficient allocation of capital.
Thus, shares represent not only ownership in a company but also an important mechanism through which savings are converted into productive investments in the economy.
✅ In essence:
Shares transform individuals from mere savers into co-owners of productive enterprises, while dividends represent the reward for this ownership.