Understanding Stocks and Shares

Understanding Stocks and Shares

Equities refer to a stock of a company measured in number of shares.

  • Very often, the terms, “equities”, “stocks”, “shares” and “securities” refer to the same thing.
  • Buying stocks represents a share of ownership in the company and you become its shareholder.
  • Shares are bought and sold on stock exchange(s) like the Bombay Stock Exchange (BSE).

Ways to Earn Returns

  • Capital Growth
    When the current stock price rises above its purchase price over a period of time.
    • Example: If a stock was bought at INR 1.00 per share and sold at INR 1.15, the return from capital growth is 15% ((INR 1.15 - INR 1.00)/INR 1.00 x 100%).
    However, capital gain is unrealized until your stock has been sold off.
  • Dividends
    When a company distributes a portion of profits to shareholders in cash or additional stocks.
    • Example: A company pays dividends of 2 paisa per share. If you hold 100 shares, you will receive INR 2 (INR 0.02 x 100).

Benefits & Risks

Benefits

Ease of trading

Stocks may be bought or sold on the stock exchange.

Ownership

You own a part of the company when you buy its shares. This allows you to benefit from the company’s growth and profit.

Price transparency

Stock prices are reflected in real time on the stock exchange, allowing investors to buy and sell at their desired prices.

Risks

Capital risk

Stock prices may rise or fall depending the company’s performance and other factors affecting the market.

Volatility risk

Stock prices may rise or fall sharply over the course of a day. The higher the volatility, the higher the risk. Constant monitoring of market movements and stock prices may be required in times of high volatility.



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