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Share or Stock: Meaning, Features and Types

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In the previous chapter, you understood the different investor categories and how they influence the market. In this and the upcoming few chapters, let’s go through the various types of investment instruments. This chapter is dedicated to understanding what stocks are.

What Is a Share or Stock?

Assume you own a premium bakery chain looking to expand your business. You have explored various funding options and would now like to go for equity. In case of equity, you sell ownership of your business for funds. Think of it like this. Your business represents a pizza, which has 10 slices. If you want to sell that pizza in the market, there would eventually be a price for it. That price is the value of your entire business. Let’s say the pizza (business) is worth ₹1,000.

That price is also the value of the ownership of the company. So, if you sell the entire pizza, you give away 100% of the ownership and get the monetary value. But if you sell only two pieces of the pizza, you sell part of the business. This means you sell 20% of the ownership and get ₹200 in return.

In the case of a company, each slice of the pizza is called a share or a stock. Such shares are transferable, meaning they can exchange various hands. Today, Aaron might buy them. Tomorrow, he can sell them to Chris.

Types of Stocks 

Stocks or shares are primarily of 2 types, common stock and preferred stock. Let us quickly go over their differences:

  1. Common Shares: Common stocks represent company ownership and offer voting rights plus variable dividends. They are riskier, as they are paid off during liquidation after preference shares and debt.
  2. Preference Shares: Such shares offer fixed dividends paid before common shares, no voting rights, but priority consideration during liquidation. 

Both raise capital for companies but cater to different investor needs in India's dynamic market.

Features of Equity Shares

  1. Ownership and Vote: Equity shares grant partial ownership and voting rights to investors or shareholders, allowing them to influence company decisions.
  2. Profit Share or Dividends: Investors receive potential profit share via the distribution of dividends based on company performance, not guaranteed.
  3. Limited Liability: Shares give liability limited to the invested amount, protecting personal assets.
  4. Capital Fluctuation: There is potential for an increase or decrease in the share price based on company performance and the market sentiment. This helps in the appreciation and depreciation of your invested capital.

Types of Income from Stock Ownership

You can earn money from owning shares in the following ways:

  1. Capital appreciation

If you buy a stock at ₹100 per share and then, after a few days, sell the same shares at ₹150 per share, then the difference between the two prices, i.e. ₹50 per share, becomes your profit. This means if you buy a stock whose price is likely to increase in the future, then you may eventually earn a profit after selling it. Expecting to receive such profit, many people invest their money into stocks. 

Historically, stocks have given higher returns than fixed deposits or debt instruments. However, they are also relatively riskier in the sense that a company can fail to grow and eventually shut down. In such cases, the value of the stock drops and you incur a loss.

For example, if you launch the Angel One app, you can check how much your capital has appreciated overall and on that day. The following picture shows the overall gain or loss and today’s gain and loss.

  1. Dividend income

Sometimes, a company may decide to distribute a portion of its profits among the shareholders. This amount is known as a dividend. It is one way of appealing to the shareholders to continue holding stocks and in a way, increase the demand for the stock in the market.

  1. Short selling in intraday

Finally, in some cases, you are allowed to sell a stock in the morning and then buy it back before the trading day ends. This means it is not necessary for you to own the stock at the moment when you make the sell transaction. This phenomenon allows you to make a profit even on a day when the price of the stock falls as you sell at a price higher than the buying price. This phenomenon is called short selling. 

However, you need to buy the same share in the same quantity by the end of the day in order to go through with the short selling. This is because you must have the shares that you sold in the morning at the time of its delivery to the buyer in that transaction. You will be able to deliver these shares only if you have bought the same quantity of shares and have them at the time of the said delivery. This is possible because it takes one extra day to actually take delivery of the shares.

Where Are Stocks Bought and Sold?

There are two ways in which stocks can be bought and sold:

  1. Private deals - Stocks can be sold in large block deals to big institutional investors such as Peak XV Partners, Tiger Global or any other private firm.
  2. Public trading - The company can choose to let the common public buy and sell shares in the open market by releasing some of their shares into the public market through an IPO.

How To Buy Stocks in the Public Market?

If you are not trading on behalf of an institution, then you are likely a retail trader or investor. In that case, you can take the following steps to buy shares of a company in the public market:

  1. Open a bank account with a bank of your choice.
  2. Open a demat account and trading account with a broker.
  3. Once the accounts are activated, transfer adequate funds from your bank account to your trading account.
  4. Find the stocks that are available in the public market. Do some research about its financial health and growth prospects and choose which stocks to buy.
  5. Open your Trading account, e.g. your Angel One account. Click on the search icon and look for your chosen stocks.
  6. Now, place your buy order. Simply click on the ‘Buy’ button, enter your desired quantity on the order pad, and select the order type. 
  7. To complete your transaction, click on the ‘Buy’ button.

If you don’t have a Demat account with Angel One, you can open one for free online within minutes.

What Is Trading vs Investing in Stocks?

The main difference between trading and investing is really a matter of timelines and a change in the approach. If you are thinking of holding the stocks for the short term, for example, a day or a week, then it would fall under the ambit of trading. In that case, you need to focus on either the price fluctuation patterns or a particular event that can have a short-term impact on the stock.

However, if you are planning to hold the stock for a long term, e.g. 5 years, then it would fall under the category of investing. In that case, rather than checking for short-term events and price fluctuations, you would rather look at the long-term capabilities of the company. The quality of management, the financial performance, and the ability of the company to grow and take up market share would start to matter more in your decision to invest or not.

Benefits of Investing in Stocks

  1. Higher potential returns: While riskier than safer options, stocks offer the potential for higher returns compared to savings accounts or bonds over the long term.
  2. Inflation protection: Stocks can help combat inflation by potentially appreciating in value faster than the inflation rate, preserving your purchasing power.
  3. Dividend income: Certain companies share a portion of their profits with shareholders through dividends.
  4. Ownership stake: Owning a stock grants you a portion of ownership in the company, potentially even voting rights in case of equity shares.
  5. Liquidity: Stocks are generally more liquid than other assets like real estate, allowing for easier buying and selling.
  6. Compounding: Over time, your returns can snowball through compounding, where your returns generate more returns, leading to significant wealth creation.
  7. Early retirement: Well-researched nvestments can potentially help you accumulate enough wealth to retire earlier than traditional timelines.

Risks of Investing in Stocks 

  1. Market volatility: Stock prices fluctuate, and downturns can lead to significant losses.
  2. Company risk: Individual company performance can negatively impact your investment, even in a healthy market.
  3. Liquidity risk: Less popular stocks may be harder to sell quickly, potentially hindering access to your funds.
  4. Inflation risk: If returns don't outpace inflation, your purchasing power can decrease.
  5. Psychological risk: Emotional responses to market swings can lead to impulsive decisions, harming your portfolio.

Average Return on Equities in India

India has been an emerging economy for decades now. It has had one of the highest economic growth rates in the world. This makes one curious as to how the stock market has performed in this period. Get ready to discover the fascinating truth about the average stock market return in India over the years.

Short Term View

  1. The Indian stock market has outperformed major markets in the world on a 3-year, 5-year and 10-year basis. 
  2. The Nifty large-cap index has delivered a 10.9% annualised return over the past 10 years, compared to 6% of the US index and 2.7% of China's market.
  3. In the last 5 years, the Nifty 50 delivered roughly 18% of annualised returns, compared to 6.9% of the US, and 12.1% of the Japanese index. 

Long Term View

Since June 30, 1999, till December 15, 2021, the Nifty 50 Total Return (TR) index has given annualised returns of 14.2% CAGR with an annualised volatility of 22.9%. TR index assumes dividends are reinvested in the index and hence represent both Price Return (PR) and Dividend return.

This shows that in the long run, investing in an index like the Nifty 50 would have given you a rough 14% return every year. In that case, in 20 years, a 100 investment would have turned into ₹1,618. Compare that to saving money in a bank, i.e. in a savings account at roughly 2% or in a fixed deposit at roughly 7.5%. That would have turned your ₹100 into only ₹149 or ₹446 in that same period.

Final Words

Now that you have a basic idea of what stocks are, we can move on to other investment instruments. Next in line is indices, which have a unique set of characteristics of their own. Check out the next chapter to know more!

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