Shares are equity ownership units in a corporation. Shares exist as a financial asset for some companies, providing for an equal distribution of any residual profits, if any are declared, in the form of dividends. Shareholders of a stock that does not pay dividends are not entitled to profit distribution. Instead, they expect to profit from the rise in the stock price as the company's profits rise. In this article, we will see the meaning of Shares and their types which is important for the UPSC Examination.

What are Shares and Who are Shareholders?

• Shares are the units into which a company's absolute share capital is split or divided.
• As a result, the share is a fraction of the share capital and serves as the basis for a company's ownership interest.
• Shareholders are individuals who contribute money in the form of shares.
• The amount of authorized capital, as well as the number of shares into which it is divided, is specified in the Memorandum of Association,
• The divisions of shares into which the enterprise's capital is to be divided, as well as their specific obligations and rights, are recommended by the company's Articles of Association.
• According to the Companies Act, a company can issue two types of shares:

1. Shares of Preference
2. Shares of stock (also called ordinary shares)

Preference Shares

• Preference shares, also known as preferred stock, are shares of an enterprise's stock that pay dividends to members before equity share dividends are distributed.
• If the company goes bankrupt, the members who own preferred stock are entitled to be paid from the company's assets.
• The majority of preference shares have a fixed dividend, whereas most do not.
• Preferred stockholders do not have voting rights, whereas equity shareholders do.

Features of Preference Shares

• Preference stock is a long-term source of funding.
• The dividend on preference shares (PS) is typically greater than the debenture interest.
• Preference shareholders (PSH) receive a fixed dividend rate regardless of profit volume.

Equity Shares

• Ordinary shares were previously referred to as equity shares.
• The shareholders of such shares are the true owners of the company.
• They have voting rights in the huddles of the enterprise's owners.
• They have complete control over the operation of the business.
• The dividend is paid to equity shareholders only after the dividend is paid to preference shareholders.

Features of Equity Shares

• The company retains its equity share capital. It is only returned when the business is closed.
• Equity shareholders have voting rights and help to choose the company's management.

Types of Equity Shares

• Authorized Share Capital: This is the maximum amount that an organization can issue. This amount can be changed at any time based on the company's recommendation and with the assistance of a few formalities.
• Issued Share Capital: This is the approved capital that an organization distributes to its shareholders.
• Subscribed Share Capital: A portion of the issued capital that an investor accepts and agrees to.
• Paid Up Capital This is a portion of the subscribed capital provided by the investors. Paid-up capital is the money that a company actually invests in its operations.
• Right Shares: These are the shares that a company issues to its existing stockholders. The company issues this type of share to protect the proprietary rights of existing investors.
• Bonus Share: A bonus share is when a company divides its stock among its stockholders in the form of a dividend.
• Sweat Equity Share: This type of share is only given to outstanding employees or executives of a company for their outstanding work in providing intellectual property rights to the company.

Advantages of Equity Shares

• The term ES (equity shares) does not imply a sense of obligation or accountability to pay a fixed dividend rate.
• ES can be distributed even without imposing any additional charges on a company's assets.
• It is a continuous source of funding, and the enterprise must repay it; in the worst-case scenario, it is liquidated.
• Equity shareholders are the true owners of the company and have voting rights.

Disadvantages of Equity Shares

• When only equity shares are issued, the enterprise cannot take credit or gain an advantage if trading on equity.
• As equity capital cannot be reclaimed, there is a risk of liability.
• By guiding and systematizing themselves, management can overcome obstacles posed by equity shareholders.
• When a company earns more profits, higher dividends must be paid, which raises the value of its shares in the market and opens the door to speculation.

Difference between Preference Shares and Equity Shares

Conclusion

Investing in stocks can be a great way to build long-term wealth for any individual investor. Stocks give you a wide range of sectors and industries to choose from, allowing you to diversify your portfolio and reduce risk.

FAQs

Question. What is the stock market?

Question. What are shares?

Question. What are the different types of shares in the Indian stock market?

Question. What are market instruments?

Question. What is the role of the Securities and Exchange Board of India (SEBI)?

MCQs

1. Which of the following is a primary function of the stock market?

A) To provide loans to businesses

B) To facilitate the buying and selling of securities

C) To control interest rates

D) To set government policies

2. What is the key difference between equity shares and preference shares?

A) Preference shareholders have voting rights

B) Equity shareholders receive fixed dividends

C) Preference shares do not carry voting rights, but offer fixed dividends

D) There is no difference between them

3. What is the role of SEBI in the Indian stock market?

A) To act as a broker for investors

B) To issue shares to the public

C) To regulate and oversee the functioning of the stock market

D) To provide financial advice to investors

4. Which of the following is an example of a secondary market instrument?

A) IPO

B) Mutual funds

C) Stock exchanges

D) Treasury bills

5. Which of the following is an investment instrument used in the capital market?

A) Treasury bills

B) Bonds

C) Savings accounts

D) Certificates of Deposit

GS Mains Questions and Model Answers

Q1: Discuss the importance of the stock market in the Indian economy.

Answer: The stock market plays a vital role in India's economic growth by facilitating capital formation. It provides companies with a platform to raise funds for expansion, innovation, and development through the issuance of shares and bonds. Additionally, it allows individuals to invest, contributing to personal wealth creation, and improves liquidity in the economy. The market also reflects the overall economic health, influencing investor confidence and international trade.

Q2: What are the major instruments traded in the Indian stock market, and how do they contribute to economic development?

Answer: The major instruments in the Indian stock market include equities (stocks), bonds, derivatives, and mutual funds. These instruments allow for the efficient allocation of capital by connecting investors with companies that require funding. Equities and bonds help businesses raise capital for expansion, while mutual funds and derivatives provide risk management tools, encouraging investment. Together, they contribute to economic development by promoting savings, enhancing financial inclusion, and fostering innovation.

Q3: Evaluate the role of SEBI in ensuring the integrity of the Indian securities market.

Answer: SEBI plays a crucial role in maintaining the integrity of the Indian securities market by ensuring transparency, preventing fraudulent activities, and protecting the rights of investors. Through regulatory measures such as the implementation of the Insider Trading Act and monitoring the activities of market intermediaries, SEBI safeguards market efficiency and fairness. SEBI's actions promote investor confidence, which is essential for the smooth functioning of financial markets and the economy.

Previous Year Questions on the Shares

1. UPSC CSE 2018

Question: "Discuss the role of financial markets in the economic development of a country."

Answer: Financial markets, including the stock market, enable the efficient allocation of resources by channeling savings into productive investments. In India, financial markets facilitate economic development by providing companies with access to capital for expansion and providing individuals with investment opportunities, fostering both personal and national wealth growth.

2. UPSC CSE 2020

Question: "Explain the concept of capital markets and their significance in the Indian economy."

Answer: Capital markets in India comprise the primary and secondary markets where long-term financial instruments such as stocks, bonds, and debentures are traded. These markets are crucial for economic growth as they provide businesses with the necessary capital to expand, innovate, and hire, while offering investment opportunities to individuals. A well-regulated capital market contributes to stable economic growth by promoting investor confidence and financial inclusion.