Tuesday, 16 February 2016

Shares and Stocks: (Simply Explained) What does it mean and how they are differ from each other? How they implement in the real world?

 Dear Aspirants,

Welcome to visit here. Today in this article we are discussing about the most important and usually used terms i.e. Shares and Stocks. It's a fact that if we know the basic concept of the terms, we can understand many things based on it. Here, we have explained this concept in very simple language with examples. You can easily understand the concept in the first reading only.
Our motto is to provide effective material instead of bulky material. 


 Assume that I have a company ( Samsung Mobile) and my company has issued 1000 shares for Rs. 100 each. And You purchased 50 shares of my company by paying Rs. 5000.

This means that you have owned 50 shares of my company and 'Stock of Rs.5000 'in my company.

  • In short, when we talk about Shares, we refer to the number of papers held by us.
  • When we talk about Stocks, we refer to the money-value of the papers held by us.
  • But ultimately, both Shares and Stocks suggest the same thing: Equity

Different type of Shares:

1. Initial public offering (IPO)- IPO is the terms when any company makes fresh issue of securities for the first time.
  2. Rights Issue- A Company has launched IPO, got funds from the public, and started a company.

After some years Company to expand the business. To meet these requirements, Company wants more money, then the company have to issue additional shares. But under the companies act, one can issue additional shares to the existing shareholders only. This is called 'Rights Issue of shares'. Here, Company will notice to the existing shareholders only, and offer them to buy new-shares, company cannot offer any other 'outsider' to buy the shares.     

 NOTE: If a Company do not want 'rights issue of shares', Company have to hold a general meeting of shareholders and pass a resolution that “Company does not need to offer new shares to the existing shareholders, and these new shares are available for anybody to purchase.

Then what is the importance of Right Issues?
1. The direct use of right issue generates more money for the business. 2. It may cause to reduce the debt to equity ratio.

How debt to equity ratio be reduced?
Usually bonds have rating which is given by Credit Rating Agency. Credit Rating Agency analysis for the bonds and based on the performance reward with the rating. The shareholders attracts with the good ratings. Before giving any rating, Credit Rating Agency looks into the debt to equity ratio. The Company with high debt to equity ratio means more debt therefore, high interest results, lower rating. It is difficult to issue shares with lower rating.

How can they improve their debt to equity ratio?
In simple language, to offer new equity (shares) to existing shareholders on discount (Rights Issues of shares). Company have to issue shares on discount, otherwise no one would buy it.

An Example:
One who already have 10 shares of my company, If he buys 10 more shares from me , each of these shares will have 'Worth Rs.100' but I’ll give it for Rs.50 only (on discount).

What benefit to my company?

In the legal record, for the calculation of Debt Vs. Equity, they’ll calculate using Rs.100 face value. Thus, my Debt Vs. Equity ratio will go down, and my rating will go better. This will beneficial for my Company to issue shares on high demand with good price.

We have explained this concept in very simple language. We hope you all understand the concept. 

Thank you and stay tuned with us for more concepts to understand in simple language.

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