In financial markets, a share is a unit of account for various investments. It often means the stock of a corporation, but is also used for collective investments such as mutual funds, limited partnerships, and real estate investment trusts.
A corporation divides ownership of itself into shares, which are offered for sale to raise share capital, termed as issuing shares. Thus, a share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value: the total capital of a company is divided into a number of shares.
The income received from shares is known as a dividend. A shareholder, also known as a stockholder, is a person who owns shares of a certain company or organization. The process of purchasing and selling shares often involves going through a stockbroker as a middle man.
Shares are valued according to various principles in different markets, but a basic premise is that a share is worth the price at which a transaction would be likely to occur were the shares to be sold. The liquidity of markets is a major consideration as to whether a share is able to be sold at any given time. An actual sale transaction of shares between buyer and seller is usually considered to provide the best prima facie market indicator as to the "true value" of shares at that particular time.
- Shares outstanding are those that are authorized, issued, and held by third parties. The number of shares outstanding times the share price gives the market capitalization of the company, which if the trading price held constant would be sufficient to purchase the company.
- Treasury shares are authorized, issued, and held by the company itself.
- Issued shares is the sum of shares outstanding and treasury shares.
- Shares authorized include both issued (by the Board of Directors or shareholders) and unissued but authorized by the company's constitutional documents.
Tax treatment of dividends varies from territories to territories. For instance, in India, dividends are tax free in the hands of the shareholder, but the company paying the dividend has to pay dividend distribution tax at 12.5%. There is also the concept of a deemed dividend, which is not tax free. Further, Indian tax laws include provisions to stop dividend stripping.
Historically, investors were given stock certificates as evidence of their ownership of shares. In modern times, certificates are not always given and ownership may be recorded electronically by a system such as CREST. What are the benefits?
As a shareholder you receive the benefits of the capital gain in the value of the company, which you may realize upon the sale of your shares. You also receive the dividends that are usually paid twice a year, as well as access to rights, bonus shares and share buy-back schemes that may be offered.
Other minor benefits are that you are entitled to attend and vote at the company general meetings and sometimes you may participate in shareholder benefits such as discounts on the products of the company. If you own the shares direct and not through a managed or mutual fund, there are no management expenses.
It is difficult for the average investor to know when to buy the share (good value?), when to sell and when to take advantage of corporate actions such as share buy-backs without professional advice. One way to have the advantage of share exposure without the need for a great expertise is to invest via a managed or mutual fund.
If you wish to gain access to the whole of a sharemarket or a sector within a share market with minimal expense, then an exchange traded fund (ETF) is another option.
Record keeping for direct shares can be difficult, especially if you reinvest the dividends. There are software programs that assist you in record keeping. If you trade or hold your shares through a stockbroker or other administration service you may also receive benefits of recording keeping.
Remember that shares are volatile investments and if the company does fail you are the last to receive any remaining capital after expenses have been paid. Diversification within a selection of other shares and asset classes is the key to manage this risk.
This is an amended excerpt from Financial Planning A to Z, to be published in late 2012. Refer my website for more details. Articles of a similar nature will be posted at the start of each week.
- "Shares Definition". Investopedia. Retrieved 2013-07-09.
- "Chapter 22 Company-An Introduction" (PDF). Accountancy. Noida, Uttar Pradesh, India: National Institute of Open Schooling. 2008. p. 242. Retrieved 24 August 2011.
- Hoang, Paul (2007). "1.4 Stakeholders". Business and Management. Victoria: IBID Press. p. 71. ISBN 1-876659-63-7.
- "How to Buy Shares". ShareWorld. Retrieved 23 February 2012.
- "All about shares and tax". Rediff India Abroad. 16 January 2006. Retrieved 23 February 2012.
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