A share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. One can buy shares either from the primary market, directly from the company during a public offering (IPO) or from the secondary market, i.e. from a stock exchange.
In India, shares / stocks are mainly of two types:
1) Ordinary Shares / Equity Shares
An equity share represents a unit of the overall ownership of the company. This means that it provides rights of an owner. Equity shareholders are entitled to voting rights and can participate indirectly in major decisions of the company. There is no guarantee of returns. Distribution of profits by a company to its owners is known as dividend distribution. A significant component of return for equity investors is capital gain if price appreciates. If prices depreciate, equity investors are exposed to capital loss.
2) Preference Shares
Preference shares enjoy a preference over equity shares, in the following two cases: payment of dividends and payment of proceeds if the company is wound up. In general, preference shareholders do not have voting rights and the rate of dividends is fixed. An additional feature of preference shares in India is that during such time as the preference dividend remains unpaid, preference shareholders enjoy all the rights (e.g. voting rights) enjoyed by the common equity shareholder.
Based on the company’s anticipated earning and in the light of the investment management experience the world over, stocks are classified in the following groups:
These are the stocks that have been overlooked by other investors and may have a ‘hidden value’. These companies may have been beaten down in price because of some bad event or may be in an industry that is not fancied by most investors. Value investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market realizes the real value of the company’s assets. The value investors tend to purchase a company’s stock usually based on relationships between the current market price of the company and certain business fundamentals.
Companies, which have excellent potential for growth in sales and earnings, and growing faster than other companies in the market or than other stocks in the same industry, are called the growth stocks. These companies usually pay little or no dividends and instead prefer to re-invest their profits in their business for further expansions.
These are companies whose performance shows some cyclic behavior. Their performance moves up and down, mostly following cyclic changes in the economic variables. A very good example is cement stocks. When the economy is growing rapidly, the demand for cement tends to rise. Since, in a short time frame, supply remains constant, the cement prices rise, leading to an increase in the profitability of the cement companies. When the new supply comes the prices fall and so does the profitability.