What is a share

December 17, 2023

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This article has been written by Prerna and by Nimisha Dublish. The article contains an analysis of what is a share and how it helps businesses to raise money from the public. The article also deals with the use of this share by investors to make money and contains a starter guide for beginners who are interested in investing in the stock market but don’t know where to start.

It has been published by Rachit Garg.

Table of Contents

Introduction

The world’s economies are growing and changing at a greater pace than they ever did in the past. In an era where managing finances is a bit tricky, one may own up a share of big companies to boost their finances. As we know and have read in company law, owning a share means having a say in a company’s major decisions. But let me break this to you. It is not that straightforward or easy. There are many rules and regulations that one has to comply with to control the buying and selling of shares. Nowadays, there are many trading apps available to guide you about how to invest, where to invest, etc. But one must be aware of what he’s dealing with. So to enhance and upgrade your knowledge about shares, this article will deal with the definitions, types, legalities, investment strategies, and many more. Understanding the evolution of a share is important for a person to manage their money strategically. Also, one must be highly aware of the legal implications of the same.

What is a share?

A share is the stake of a person, i.e., shareholder, in a company. It represents the interest of a member of a company. It is the interests of a shareholder in a company and helps to calculate the dividend value that is to be delivered to each shareholder. Section 2(84) of the Companies Act, 2013 defines a share as a share in the share capital of a company, and it includes stock. While a share represents the unit of ownership in a company by the investor, common stock shares enable voting rights. The investor exchanges capital in return for these units. There are various rights and liabilities attached to a share. Shares are movable property and are generally transferable in nature in the manner prescribed in the Articles of Association (AOA) of a company.

The terms shares and stocks are often used interchangeably by the common man, but they have different roles to play in the representation of a company’s share capital. This may initially seem confusing, but one can easily understand it by using an example. For example, ABC Company issued stock in public, and Mr. X purchased 10 shares of it. Now, if each share represents 1% of a company, Mr. X is the owner of 10% of the company in this case. In short, the company issued stock, and Mr. X purchased a share of it. Layman uses the term stock to refer to the financial instrument a company issues, while shares are what a person actually buys.

Why do businesses issue shares

When a business is established as a corporation, the owners can choose to raise capital by issuing shares. The stock of a company is further divided into shares to make them sellable to investors. Companies issue shares because they are equivalent to ownership, not debt. So, there will be no legal implication or obligation on the company to reimburse the shareholders if something happens to the business. In privately held companies, the founders, partners, and executives hold shares. They generally issue the shares through company stock options or as other incentives to the employees. These are also regulated, but are outside the rigorous scrutiny of the Securities and Exchange Board of India.

How these companies issue shares and regulate them

The board of directors of a company is given a specific number of shares that can be issued. These are called authorised share capitals. The shares are issued out of this authorised share capital and are called issued shares. This means that the company may have Rs. 10 lakhs as authorised share capital but still chooses to issue Rs. 8 lakhs worth of shares. To increase this authorised capital, board meetings and other meetings are to be held in order to amend the articles of the company. The shares of publicly listed companies are listed on stock exchanges through an IPO (Initial Public Offering). The company in this case undergoes a high level of scrutiny by the regulators and is both expensive and time-consuming. This will be further discussed in the article.

What is a stock

A stock, usually referred to as equity, is a type of security that denotes a tiny portion of a company’s ownership. A share is a small portion you possess when you buy stock from a corporation; you become a shareholder when you do so.

Classes of Share Capital

According to Section 43 of the Companies Act, the share capital of a company limited by shares shall be of two kinds, namely Equity Share Capital and Preference Share Capital, unless otherwise specified in the Memorandum of Association or Articles of Association of a private company.

Preferred Share Capital

What does preferred share capital mean?

Preference shares, also known as preferred stock, are shares of a company’s stock that pay dividends to shareholders ahead of dividends on regular stock. Preference shareholders may get the dividend as a set amount. Preference shareholders are given “priority” over equity owners when it comes to receiving dividends. Preference shareholders are entitled to receive payment from corporate assets before common stockholders and the company’s preference shares have a fixed dividend, whereas common equity often does not. In contrast to common shareholders, preferred stockholders normally do not have voting rights. The only resolutions that the preference shareholders can vote on are those that directly affect their rights as preference shares and those that call for the liquidation of the business or the repayment.

Types of Preference Shares

Convertible Preference Shares

Shares of convertible preferred stock are those that are easily convertible into equity shares.

The shares can be converted into equity shares after the period already determined and as per the articles of association of the company. The procedure for conversion is given under the articles of association of the company.

Non-Convertible Preference Shares

Preference shares with a non-convertible conversion feature cannot be converted into equity shares.

The shares cannot be converted into equity shares. There is a fixed rate of dividend, and the holders have a prior right over the assets at the time of liquidation.

Redeemable Preference Shares

The shares that the issuing business can buy back or redeem at a set price and time are known as redeemable preference shares. These shares benefit the business by acting as a cushion against inflation.

The procedure for redemption, along with the price and conditions, are mentioned in the Articles of Association of the company. After the redemption of preference shares, the company may issue the shares up to the nominal amount of shares that were redeemed as if they were never issued before.

Non Redeemable Preference Shares

Non-redeemable preference shares are ones that the issuing corporation cannot redeem or repurchase at a certain date. Non-redeemable preference shares are a lifesaver for businesses during inflationary periods.

They are also known as perpetual preference shares. They do not carry a maturity date with them. They are paid at the time of winding up of the company.

Participating Preference Shares

When the company is liquidated and dividends have been distributed to other shareholders, participating preference shares enable shareholders to seek a portion of the leftover profit.

However, along with equity shareholders, these shareholders also receive set dividends and a share of the company’s surplus profits.

Non-Participating Preference Shares

These shares do not provide shareholders with the additional option of receiving dividends from the firm’s excess profits; instead, they get the fixed dividends that the company offers.

Cumulative Preference Shares

Shares known as cumulative preference shares allow shareholders the right to receive cumulative dividend payments from the company even while they are losing money.

When the company is not making a profit, these dividends are recorded as arrears and paid out cumulatively the following year when the company is profitable.

Non-Cumulative Preference Shares

Non-Cumulative Preference Dividends are not paid in arrears to shares. These shares’ dividend payments are made out of the company’s current-year profits.

Adjustable Preference Shares

The dividend rate for adjustable preference shares is variable and affected by current market rates.

The dividends on such shares are dependable upon the financial factors of a company, like profits, earnings per share, etc. The dividend rates fluctuate as per the financial performance of the company. This provides the shareholders with a chance to get higher returns in prosperous times.

The company gets more flexibility while dealing with such shares as they provide smooth cash flows and profit distribution is done as per the company’s financial performance that year.

Characteristics of Preference Shares

Preference shares offer a number of advantages that have allowed regular investors to outperform them even during slow economic development periods. The following list of preference share benefits is most appealing:

They are transformed into common stock

It is simple to convert preference shares into ordinary stock. A shareholder’s shares are changed into a set number of preferred stocks if they wish to modify their holding position.

Investors are informed that certain preference shares may be converted at any time after a certain date, while other shares may need the board of directors’ consent in order to be converted.

Dividend Payouts

With preference shares, shareholders can receive dividend payments when other stockholders would not or may receive dividends later.

Dividend Priority

Preference shareholders, as opposed to equity and other shareholders, have the significant advantage of getting dividends first.

In the event of unusual circumstances, stockholders with the Voting Rights Preference have the ability to vote. However, this is hardly an occasional occurrence. Normally, buying shares in a firm does not grant you voting privileges in the management of the company.

Voting rights

In the event of extraordinary occurrences, preference shareholders are entitled to the opportunity to vote. However, this hardly occasionally occurs. Normally, buying shares in a firm does not grant you voting privileges in the management of the company.

Asset Preference

Preference shareholders are given precedence over non-preferential shareholders when discussing a company’s assets in the event of liquidation.

Equity Share Capital

A common investment choice for investors is equity shares. A portion of the corporation is available as equity shares. As a result, equity stockholders are regarded as a part of the ownership group. Initiation Public Offerings (IPOs) are used to first issue equity shares to the general public (IPO). Equity shares start trading after they are listed. The characteristics and forms of equity shares are thoroughly discussed in this article.

Equity shares

Equity share capital encompasses all the share capital, which is not preference share capital. Equity shares are also known as ordinary shares and represent a basic form of ownership in the company. These shares possess certain rights, like dividends, voting rights, stakes in the company’s assets at the time of liquidation, etc.

To acquire a portion of the company, investors seek to buy the equity shares. They get a part in the equity split of the company. In another sense, we can say that they become the owners of the company by holding these shares. Equity shares are issued with the intent of raising money for the expansion and growth of the company. The company issues these shares through an Initial Public Offering (IPO) i.e. for the general public and investors. As soon as the stocks are allocated and listed on the stock exchange, you can easily trade them. Popular stock exchanges in India include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The worth of the company is determined by the face value or book value of the equity share. The price of the share increases with the increase in purchase. In the market, while trading these shares, the prices are set by the market forces, i.e., demand and supply.

An investor invests in the company to gain from its capital appreciation if its growth prospects are strong, and similarly withdraws the share as soon as the performance of the company drops. To understand the market, one must have a basic knowledge of the market and the financial statements of the company. One must be able to appreciate the performance of the company to determine whether it’s an investable venture or not.

Equity share types

The many types of equity shares are as follows:

Common Shares

The shares a firm issues in order to raise money to cover long-term expenses are known as ordinary shares. Investors receive a portion of the company. The amount corresponds to the number of shares held at that time. Voting privileges will be available to common shareholders.

Preference Shares

Preference equity shares guarantee that investors will receive cumulative dividends before common shareholders. Preference shareholders, on the other hand, don’t have the same membership and voting privileges as regular shareholders.

There are two types of preference shares: participating and non-participating. Investors who purchase participation preference shares are entitled to a predetermined profit margin as well as bonus returns. These rewards are dependent on the company’s performance during a particular fiscal year. Equity stockholders who do not participate do not receive this benefit.

Furthermore, when a corporation dissolves or winds up operations, preference owners receive their capital back.

Bonus Stock

A sort of equity share issued by a corporation from its retained earnings is called a bonus share. In other words, a corporation issues bonus shares as a way to distribute its earnings. However, unlike other stock shares, this does not raise the company’s market capitalization.

Shares of Rights

Not everyone is a good fit for rights shares. The corporation only issues these shares to certain high-end investors. The equity stake of such holders consequently rises. The rights issue is completed at a reduced cost. The goal is to raise money to meet the needs of funding.

Sweat Equity

Sweat equity shares are given to a company’s directors and employees. For their good work in supplying the company with intellectual property rights, know-how, or value improvements, they receive the shares at a discount.

Employee Stock Options (ESOPs)

ESOPs are provided by a corporation to its employees as a retention strategy and reward. Under the rules of an ESOP, employees are offered the choice to buy shares at a predetermined price at a later period.

Characteristics of Equity Shares

These are the main characteristics of equity shares:

Perpetual shares

Equity shares are perpetual in nature. Shares are a company’s long-term assets and only get returned when the business shuts down.

Significant profits

Equity shares have the potential to provide stockholders with significant returns. These are dangerous investments possibilities, though. Equity shares are therefore very volatile. Price changes can be abrupt and are influenced by a variety of internal and external factors. Investors who have a reasonable level of risk tolerance should only think about investing in these.

Dividends

An equity shareholder receives a portion of a company’s profits. In other words, a business can use its yearly profits to pay dividends to its shareholders. However, a business is not required to pay dividends. A corporation can decide not to pay dividends to its shareholders if it doesn’t produce good profits and doesn’t have excess cash flow.

Voting Rights

Voting rights are often available to equity shareholders. They can choose who will run the business because of this. By selecting competent managers, the business can increase its yearly turnover. Investors should therefore expect to see higher average dividend income.

Additional Earnings

Any additional profits a corporation makes are distributable to equity shareholders. As a result, the investor’s wealth rises.

Liquidity

Equity shares are extremely liquid investments. On stock exchanges, shares are traded. You can, therefore, purchase and sell the shares at any moment during market hours. Consequently, one need not be concerned about selling their stock.

Limited Liability

Ordinary shareholders are not impacted by a company’s losses. In other words, the shareholders are not responsible for the debt obligations of the business. The price of equities is down, and that’s the only effect. The return on investment for a shareholder will be impacted by this.

Difference between equity share and preference share

S. No.	Basis of difference	Equity Share	Preference Share
1	Meaning	These are the ordinary shares of the company that represent the ownership of the company.	These are the shares that carry a preferential right over them with respect to dividend payment and repayment of capital.
2	Rate of dividend	May vary from year to year depending on the availability of profits.	The dividend is paid at a fixed rate.
3	Arrears of dividend	No arrears are given for past dividends	Cumulative preference shareholders can get arrears on previously not-paid dividends
4	Redemption	They cannot be redeemed. An exemption for reduction of share capital is there, under which they can be redeemed.	They can be redeemed as per the terms and conditions in the Article of Association.
5	Voting	They enjoy voting rights	They do not have a right to participate in the company’s management activities, including voting.
6	Payment of dividend	The payment of dividends is done only after paying them to preferred shareholders.	They have a preferential right over dividends before equity shareholders.

Issue of shares by private companies

A private company can issue shares and have shareholders as its members and owners but the shares cannot be traded on public exchanges. In the case of private companies, the shares are not issued through an Initial Public Offering (IPO). As compared to the public companies and shares that are listed on the public exchanges, the private company’s shares are less liquid. The reason is that they are traded only amongst a few close investors and open public participation is not allowed. It is not possible to determine the market value of the shares of a private company as compared to a public company.

Private placement

The companies may issue shares via private placement as mentioned under Section 42 of the Companies Act, 2013. A company makes a bid or invitation to purchase the securities only to selective individuals. This is done by offering a service agreement for private placement. The process must satisfy all the requirements as stated in Section 42 of the Act. The offer can be made to up to a maximum of 200 people in total during the fiscal year. The employees under the Employee Stock Option Plan (ESOP) plan are excluded from this 200 figure. Qualified institutional buyers are also not included. An online application must be made before the letter of private placement is proposed. The online application must be explicitly addressed to the person to whom the proposal is being made and it has to be submitted within 30 days from the date of registration of the name of that person as per the provisions of the Companies Act.

The individuals making the bid should purchase the securities directly from the bank account and a full record of the transaction must be maintained by the company. The shares shall be allotted within 60 days of receipt of money from the application.

Issue of Sweat equity shares

Sweat equity shares can be given to the executives and employees of the company as per Section 54 of the Act. A special resolution must be passed for the allocation of the sweat equity shares. This shall be effective for a term of 12 months from the date of its passing. They are locked in and untransferable for a term of at least 3 years from the date of allocation. The prices are decided by the licensed valuer as per the standards of the industry and reasonably.

Issuance of Bonus Shares

Bonus shares are issued under Section 63 to the shareholders of the company. Bonus shares are given without investing additional capital. These are issued as per the current holding of the shareholders. These are issued out of free reserves, premium securities account and capital redemption account of the company.

Rights issue

Section 62 of the Companies Act governs the process of the rights issue and also gives the shareholders a pre-emptive right to subscribe to such kinds of shares. This is a formal invitation from the company to its existing shareholders to invest in the company and buy additional shares. The company issues these shares in proportion to the shareholding of the shareholders in order to raise the subscribed capital. Generally, these are offered at a price lower than the prevailing market price of the shares. This is the most apt form for a company that wishes to raise more funds without incurring any additional costs. This seems to be a more feasible option rather than borrowing money from banks or financial institutions. This helps reduce the documentation and compliance requirements.

Conversion of loan

A private company converts the loan raised to debentures issued into the shares of the company. This can only happen after passing a special resolution by the company’s members and shareholders. The terms of the agreement as well as the Articles of Association must have this clause only then it will be valid.

Issue of share by public company through IPO process

Appointing Investment Bankers and Underwriters

Investment bankers and underwriters are the experts who carry out the whole process of Initial Public Offering (IPO) for a company on their behalf. These are the intermediaries between the company and investors.

Registration

A registration statement is prepared by the company and investment bank. A draft prospectus known as a Red Herring Prospectus (RHP) is also drafted and it is the most essential document for the retailer to evaluate the offer. It contains all the details of the company except for the price and quantum of shares. These are submitted as per Section 32 of the Companies Act, 2013.

The RHP must be submitted to the ROC at least 3 days before the offer is made open to the public for bidding. Any variation in the prospectus must be highlighted and approved by both ROC and SEBI. Once the bidding closes, the company shall submit the final prospectus to both ROC and SEBI.

Cooling-off period

After the prospectus is filed with the SEBI and ROC, there comes the cooling period in which the SEBI verifies the facts and details disclosed by the company during the issue. Any errors, omissions and discrepancies are pointed out. After the SEBI approves the application, the company can set a date for the Initial Public Offering.

Application to the Stock Exchange

An application is filed with the stock exchange to float the initial issue.

Creates the buzz

The buzz is created for the grand Initial Public Offering (IPO) and excitement is spread all over the investor circles. After the approval of the IPO, the investment bankers and underwriters get into action. They have the responsibility to spread the word about the IPO. Potential investors are convinced. The company highlights the growth prospects of the business and its target to acquire market share. Many companies hire business analysts and fund managers to get the job done. Companies also arrange small group meetings for the investor’s queries a few days before floating.

Pre-launch requirements

The companies ensure that the insiders of the company don’t trade the Initial Public Offering information and details that are confidential because it prevents the corrupt executives from pawning off overpriced shares at the expense of general buyers. It helps the market from getting flooded with too many shares that may disturb the natural demand-supply balance.

Initial Public Offering (IPO) floats

Finally, the issues are floated in the primary market and money is raised from the investors. The bidding period is usually 5 days (business working days).

The IPO shares are allotted within 10 days of the last day of bidding. In case of oversubscription, the shares are allotted in proportion.

All of this is a months-long process and the company is required to do all the paperwork and endless legal work to comply with the provisions in order to issue an Initial Public Offering ( IPO).

Buy Back shares

Till now we have seen how a company issues shares and what are their types. Now, when a company wishes to take back its share from the market and buys back its shares from the market is known as the buy-back of shares. The company pays the market value of the shares to the shareholders. A stock buy-back is a way for a company to reinvest in itself.

A buyback is majorly done for the purposes of surplus cash accountability, increasing the share price of the company and discouraging takeover bids.

Now, the cash or money used to buy-back the shares is not taken out of the regular earnings of the company. It has to be taken out of the free reserve, securities premium account and proceeds of any issue. The buyback must be permissible in Articles of Association, and the maximum buyback can be 25% of the paid-up share capital and free reserve. A special resolution must be passed by the shareholders in the meeting. Along with this resolution, a statement of solvency must be signed by two directors. One has to be the managing director. Also, buyback can be from the existing shareholders only.

Issue of share at premium and at discount

Share on Premium

Generally, shares are issued by the company at par with or at the nominal value of the share. But this is not always the case. Sometimes, shares are issued at the value which is higher than the nominal value of the share, which is known as missing share in premium. Section 52 of the Companies Act contains the provisions for premium share. It states that whatever premium received by issuing share at premium will be shall be transferred to a separate securities premium account

Shares on discount

As per Section 53 of the Act, issuing shares at a discount is prohibited. The clause also provides for a penalty if a company or officer in default does so. The company shall also be liable to refund with 12% p.a. interest from the date of issue of such shares to the person to whom such shares have been issued. However, there is an exception in Section 54 of the Act. In the case of sweat equity shares-issue of shares to creditors, rights issue at discount and offer for sale.

Transfer and transmission of share

Transfer of shares

The physical movement of an asset is known as a transfer. This movement in the case of shares can be voluntary or operational by law. The transfer of shares takes place voluntarily by the owner/holder of the shares. This act is done by way of contract. Transfer of shares is the intentional transfer of the title that a share carries. The transaction occurs between the transferor and the transferee (one who receives the title). The shares of a private company are not transferable in nature except for certain conditions. Whereas the shares of a public company are freely transferable unless disallowed by the company with reasonable justification. A transfer deed has to be executed for the transfer of shares.

As per Section 56 of the Companies Act, 2013 read with Rule 11 of the Companies (Share Capital and Debenture) Rules, 2014, for the transfer of shares to take place one needs to file a special form SH-4. The form must be duly stamped, filled out correctly and signed by both the person involved in the transaction. The form shall be submitted within 60 days from the date of signing to the company. If in case the shares transferred are not fully paid up then an application must be submitted under form SH-5. The company then informs the person to whom the shares are getting transferred about this. Now the transferee has a 2-week time period to approve the transfer. The company is required to deliver the certificates within 1 month from the date of receipt or application as applicable, unless prohibited by any provision of law or court/tribunal.

Transmission of shares

The transmission of shares takes place due to the operation of law. This happens on the death of the holder of shares or in the event when the holder becomes insolvent or lunatic. This can also happen when the holder is a company that has wound up. In case of the death of a person the shares are transferred in the name of a legal representative and in case of insolvency it gets transferred in the name of the official assignee.

Section 56 of the Companies Act, 2013 read with Rule 11 of the Companies (Share Capital and Debenture) Rules, 2014 deals with the application procedure. The transmission will take place when the application of transmission of shares along with relevant documents filed are valid. In this case, an execution deed is not required. The documents required are as follows-

Certified copy of the death certificate of the holder/owner of shares
Self-attested copy of PAN
Court Decree (if applicable)
Succession certificate (if applicable)
Probate of Will (if applicable)
Will (if applicable)
Letter of Administration (if applicable)
Specimen signature of successor

The company is required to deliver the certificates within 1 month from the date of receipt or application as applicable unless prohibited by any provision of law or court/tribunal.

Difference between transfer of shares and transmission of shares

S. No.	Basis of difference	Transfer of shares	Transmission of shares
1	Definition	It is a physical and voluntary act of transfer of ownership title of the shares to another person (transferee)	It is operational by law in order to get the shares transferred to another person.
2	Nature	Voluntary act	Operational by law
3	Initiators	Transferor and transferee	Legal heir and receiver
4	How it takes place	It is a deliberate act of the parties	It occurs due to insolvency, lunacy, death, winding up or inheritance
5	Consideration	Yes, there must be a consideration	No
6	Transfer Deed	It is compulsory	It is not compulsory
7	Stamp duty	The Stamp duty is payable on the market value of shares	The Stamp Duty is not payable

Forfeiture and surrender of shares

Forfeiture of share

If a shareholder fails to pay the allotment money or the call money or any part due on the shares held by him, his shares may be forfeited and by passing a resolution the Board of Directors can do this. The Articles of Association of the company must empower them to do so. Thus, the forfeiture means confiscation of shares if a shareholder defaults to pay the allotment or call money. In this case, the part money paid is not refunded to the shareholder and his name is removed from the register of members. The forfeiture will be valid only if it is in the articles of the company, a notice of forfeiture is served to the shareholder in default, a resolution of the board is passed and if the intentions are bona fide.

Surrender of shares

This is a voluntary process of returning the shares to the company. This usually happens when the shareholder realises that he will be unable to pay the future calls on shares. The essence of this process is similar to that of forfeiture, but instead of the company taking actions against the shareholder, the shareholder himself initiates the process. However, a company cannot unanimously accept the surrender. There are certain conditions and restrictions to the same. For example, it has to be authorised under the Articles of Association. If the surrender is deemed illegal, then the court may order to restore the shareholder’s name in the register of members.

There is a difference between the forfeiture of shares and the surrender of shares. Forfeiture happens when the shareholder fails to pay the installments which ultimately leads to cancellation of his share allotment. Whereas, surrender of shares takes place when the shareholders return their shares for cancellation on their own. One can surrender his share to prevent the forfeiture of shares. The surrender is considered a reduction of capital. Surrender is not recognised by the Companies Act, whereas forfeiture is. In short, surrender is an alternative solution for the forfeiture of shares. Surrendering the shares before getting them forfeited can also save the reputation and documentation.

Difference between forfeiture of shares and surrender of shares

S. No.	Basis of Difference	Forfeiture of shares	Surrender of shares
1	Definition	It is the cancellation of shares of a shareholder by the company if he fails to pay the allotment or call money to the company.	It is a voluntary act of the individual shareholder who feels that he won’t be able to pay the future call money and due to this reason surrenders the shares of the company himself.
2	Initiation	The company initiates the proceedings if the shareholder fails to pay the call money	The shareholder initiates the proceeding himself
3	Type of act	It is a compulsory act	It is a voluntary act
4	Time involved	It takes a long time for the settlement to take place	It is a quicker process as compared to forfeiture of shares by the company
5	Impact	It can hamper the reputation of the associated party	Since this is a voluntary act it does not hamper the reputation in any manner

Share Capital: What is it?

Share capital, which includes both common and preferred stocks, is the sum of money that a business can legitimately raise through the sale of shares. The majority of the time, fresh public offerings are used to raise the share capital.

The maximum amount a corporation can raise in a public offering is its authorised share capital, though it can raise more money by making more shares available. These sales’ revenues are accounted for as “added paid-in capital.” The sum above represents the actual price paid for the shares.

The two most popular types of share capital are registered and authorised, though there are numerous other varieties as well.

Types of Share Capital

The many types of share capital are as follows:

Authorized Share Capital

All businesses must state in their memorandum of association how much capital they intend to register. The registered, approved, or notional capital is the sum thus specified. It is the sum of money that a business can raise through a public subscription, to put it simply.

Issued Share Capital

The percentage of the nominal capital that can be subscribed for by the general public as shares is known as the Issued Share Capital. An organisation need not, however, issue all of its registered capital at once. They might also seek out additional problems. As a result, it is dependent upon the company’s financial needs.

Under no circumstances may issued capital exceed allowed capital. It generally refers to every share that the signatories of the memorandum of association, members of the public, vendors, etc., own.

Unissued Share Capital

The percentage of the authorised capital that has not yet been issued is known as unissued share capital. It is the discrepancy between the authorised share capital and the issued share capital, to put it another way.

Subscribed Share Capital

The general public does not always subscribe to the total issued capital. Only a portion of the issued capital that the general public subscribes to is subscribed capital. As a result, the subscribed capital and the issued capital are not necessarily the same.

Called-up Capital

Shareholders generally make instalment payments for the cost of their shares. For instance, application distribution, first call, last call, etc. As a result, called up capital refers to the portion of subscribed capital that the company asks for or requires from the shareholders.

Uncalled Capital

The fraction of the issued capital that has not yet been paid but will be regarded as subscribed capital upon receipt is known as uncalled capital. These shares, to put it simply, are those that have been issued but have not yet been claimed. These shares won’t be included in the subscribed capital until you receive payments against them.

Paid- Up Capital

A portion of called-up capital is paid-up capital. When a firm issues a call, it refers to the amount of money that shareholders pay in response. The typical method for determining a company’s paid-up capital is to subtract called-up capital from outstanding calls.

Fixed Capital

The fixed capital includes the company’s current assets. For instance, structures, land, furnishings, equipment, intellectual property rights, plants, etc.

Reserve Capital

Until a corporation is liquidating or winding up, it cannot access the reserve money. A corporation may only establish reserve capital by a special resolution approved by 3/4 of the shareholders. The reserve liability cannot be made available at any time after the Articles of Association have been formed. The corporation is also prohibited from using such funds as loan collateral.

It also needs a court order to be converted to ordinary capital, and creditors can only access it in cases of a business closure.

Circulating Capital

One component of a company’s subscribed capital is circulating capital. The circulating capital includes assets used in operations such as accounts receivable, book debts, bank reserves, etc. It is also the capital that the business uses for its core operations.

Share Certificate

A share certificate is a document given by the company in the name of the person holding shares in the company. Section 46 governs the provisions related to the issuance of share certificates. The certificate states the shares held by that person. It is mandatory for the companies to issue share certificates after the incorporation.

The following details must be mentioned in the share certificate-

The company name issuing the certificate
Corporate Identification Number (CIN) of the company
Address of the registered office of the company
Name of the owners of shares
Folio number of the member
Number of shares issued to the person or as represented by that share certificate
Amount paid on such shares
The distinct number of shares

The share certificate must be issued within 2 months of the incorporation date and in case additional shares are issued then the certificate must be issued within 2 months from the allotment date.

Procedure for allotment of share certificate

Once the shares are allotted, the next stage is of issuance of a share certificate.

Board Meeting

A board meeting is called to decide about the allotment of shares. A committee of directors is assigned, known as an allotment committee. They decide about the allotment of shares. Once the report is provided by them, the board approves such report, and then it passes the resolution for allotment of shares to the respective applicants. The company secretary then sends the respective allotment letter to its respective members. The letter notifies the applicant that the company has allotted a certain number of shares in his name.

Register of members

The CS prepares a register of members from the list of applications received. The register contains all the details and information about the shareholder’s name, address, etc.

Preparing share certificate

The CS is required to fill in all details in the share certificate by referring to the application register and allotment sheets. The CS must ensure that the share certificate is signed by 2 directors of the company. After this, the CS is also required to sign the share certificate. It must be ensured that the certificate has the company’s seal and revenue stamp.

Dispatch of share certificates

The shareholders must be informed that the share certificates are ready to be dispatched. A public notice shall be issued for the intimation to the general public. The share certificate can be collected from the agency appointed for dispatching or personally from the company’s registered office.

Penalty

In case the company fails to comply with the provisions related to the issue of the share certificate then it shall be punishable with Rs. 25000- Rs. 500000 fine and every defaulting officer shall be punishable with a fine of Rs. 10000- Rs. 100000.

A starter guide on how to invest in shares

Many people want to earn more by investing in shares, and yes, it is a lucrative way to grow your finances over time. But before investing, it is very important for a person to know and study to find out where to start. Here is a step-by-step guide for a beginner who is interested in knowing where to start:

The most important thing before starting anything that you want to do in life is to educate yourself about it. Before investing, one must know what he/she is getting into. One can start by knowing the basics of the stock market, how the market forces work, what the different types of shares are, factors that can influence the share price, etc. One can refer to online sources such as podcasts, e-books, YouTube videos, verified blogs, and courses to expand knowledge. Some good books that one can refer to are The Psychology of Money by Morgan Housel, The Intelligent Investor by Benjamin Graham, and A Beginner’s Guide to the Stock Market by Matthew R. Kratter. One can refer to these books to understand the psychology behind investing and being a good investor.
After gathering all the required knowledge, here comes the setting of investment goals. When it comes to finances, one cannot go all in with what he has. You need to determine your risk tolerance, the time period for which you are investing, and the safe amount that you can invest. You must decide whether you want long-term gains, short-term gains, or a combination of both of them.
After you set the limit, you should aim at investing in various industries rather than only in one sector. This helps diversify and reduce the risk involved. Once you start investing in various industries, it gives you the adequate exposure to the market and an open field to judge which sector is best to invest in.
Now, you are all set to do the most practical and interesting part of the investment journey. At this point, you should analyse the financial health, performance, and growth prospects of the company. Analyse the earnings, revenue, expenditures, and market position to get a hack of the company’s long-term growth.
With the help of various stock market technical analyses, try interpreting the trends and patterns to know what is the best time to buy and sell the shares. This will help you make informed decisions on the basis of market trends and price fluctuations.
The job is not done yet. You should stay informed about the market and financial status of the company. Find out if there are any upcoming announcements that a company is planning to make which will result in price fluctuations for the shares. Monitor the performance of the portfolio regularly and make necessary changes in investment patterns as per your set investment goal.
You may also seek advice from financial advisors, who can help you know the strategies that you should adopt as per your preferences. They are the experts in this field and can advise you on your financial status.
Lastly, always start with small investments. Increase them gradually as you get more gains and become more comfortable with the investment patterns. Investing too much at once in the beginning is not a good idea as you are a beginner and don’t know the market trends and their pros and cons.

Conclusion

To master the art of trading in the stock market, one must have a deep understanding of the legal and financial dynamics. Any corporate organisation needs money to operate and grow. It has the option of raising money internally or from outside sources. The issuance of shares and the raising of cash can be further inferred as being essential components of any business or firm. It is evident that when a business is in good condition, it can take care of its directors, shareholders, and employees while also inspiring them to work harder. The article gave us an understanding of what a share is and how a company and investor can use it to their benefit.

Frequently Asked Questions (FAQs) (new heading in the end)

What is a share in layman’s terms?

A share represents the unit of ownership in the business. A share is something that can make a profit for you. One who invests in a share opens the opportunity to earn profits and has an ownership stake in the companies he/she invests in.

Can a person make money by shares?

Yes, one can make money by shares through capital gains, dividends, or buybacks. Though it is quite unpredictable if one doesn’t invest money judiciously, and it does not always give you gains, sometimes one can go into losses.

Which types of shares are the best to invest in?

Every person has a preference and requirements, and as per that, one gets to decide what is best for him/her. In general, preferred stock is best for investors who seek long-term growth. There is a high potential for getting long-term returns.

What is the nature of shares?

Shares are movable property of a company and can be transferred as per the manner provided in the Articles of Association.

What are the three key fundamentals in the process of issuing shares?

The three key fundamentals are the issue of the prospectus, receiving applications (minimum subscription requirement), and allocation of shares.

Is issuing shares an asset?

Once a company issues a common stock, it represents the sale of ownership of the company to the investors in exchange for capital. The proceeds that the company receives from the sale of its common stock are an asset. The common stock is recorded as an asset in the financial statements of the company.

References

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