What Are Shares: Definition, Working & Types Explained

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    what are shares

    What Are Shares?

    Shares of a company or a legal business entity represent its ownership. When an individual buys the shares of a company, that person becomes an owner of the company or has a percentage of ownership of that company. They represent the units of equity ownership in a company. Shares can be considered as a financial asset to the company. The investors or the shareholders who have invested in the shares of a company are liable to receive dividends when a company announces its profit. This is how the shareholders participate in the profit distribution of the company they have invested in. The shareholders of a stock that does not pay any profits do not get to participate in profit distribution. Stock shareholders do not get direct dividends, instead, they earn a return on investment when the stock prices go higher as the company makes a profit.

    How Do Shares Work?

    The purpose of selling shares is to raise capital for a company. The shares of a company are issued through a public offering in the market. The market can be primary and secondary. In the primary market, the companies sell their new stocks and bonds to the public for the very first time which is known as Initial Public Offering (IPO). In the secondary market, these stocks and bonds are traded from the investors to the public and so on. When people invest in these shares, which means that they buy the shares of the company, they become shareholders owning a fraction of the company. These shareholders are then able to participate in business decisions and profit distribution depending upon the type of shares they have invested in.

    Common And Preferred Shares

    There are two basic categories of shares that are available to the public for investment – Common Shares and Preferred Shares. 

    The common shareholders represent ownership in a firm and are entitled to elect the board of directors and vote for the major corporate decisions and policies. Common shares tend to yield a higher return on investment to the shareholder on a long-term basis. When a company liquidates, the shareholders of common shares get their rights to the assets of the company when the preferred shareholders and debtors have been fully paid and the company does not have any payments pending in the accounts payable. Preferred shareholders get a fixed dividend regularly and are paid first in the event of liquidation.

    Authorized Shares and Issued Shares

    Authorized shares are those units of equity or ownership that have already been issued to the shareholders. On the other hand, issued shares have already been issued to the public shareholders. Authorized shares are those that a company’s board of directors are allowed to issue. Issued shares have already been invested in by the shareholders in the secondary market and are counted as their ownership.

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      Shares v/s Stocks

      Shares and Stocks can be used interchangeably at times but there is a small difference between the two. A share is a percentage of ownership in a company where the shareholders get to participate in the profit distribution when announced by the company. On the other hand, a stock represents the ownership of a fraction of a company or a corporate entity. The owner of a stock is entitled to the assets and profits of the corporation in proportion to their ownership. Units of these stocks make shares. Thus, in simpler words shares represent the equity shares in a corporation that can be bought by people in order to become shareholders in the company.

      Conclusion

      Shares represent the percentage of ownership you have when you invest in a company. Shares are different from stocks as multiple stocks of a company make a share. Shares are issued in public for investors to buy them and become shareholders of the company. Shareholders of a company can participate in profit distribution and business-related voting according to the type of share they own. Thus, the public issuing of shares is done in order to raise capital for a corporation.

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