Shares, also known as stocks, are a way to own a small piece of a company. When a company wants to raise money to grow or expand their business, they can do so by selling shares to people like you and me. When you buy a share of a company, you become a part-owner of that company.
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What are Shares or stocks?
Shares, also known as stocks, are a way to own a small piece of a company. When a company wants to raise money to grow or expand their business, they can do so by selling stocks to people like you and me. When you buy a share of a company, you become a part-owner of that company.
For example, let’s say there’s a company XYZ wants to expand their business to different locations. To do this, they decide to their sell stocks to the public.
Ownership in a company through buying stocks
If you wanted to buy a share of XYZ, you would pay a certain amount of money (called the “price” or “value” of the share) in exchange for a small piece of ownership in the company. If the price of a share is Rs.10 and you buy one share, you own say., 1/10000 th of the company.
Now, you might be wondering why someone would want to buy a share of a company in the first place. Well, when a company does well and makes a profit, the value of the company can increase. This means that the price of the shares can also increase. If you own stocks of a company and the value of those stocks goes up, you can sell them for a profit.
For example, let’s say you bought one share of XYZ for Rs.10, and the value of the company increased because they were doing well and making lots of money. The price of a share might go up to Rs.15. If you decided to sell your share at that price, you would make a profit of Rs.5.
That’s the basics of what shares are and why people buy them.
How do Shares Work and What are the Risks and Benefits?
Now that you know what shares are, let’s talk about how they work and some of the risks and benefits of owning them.
When you buy a share of a company, you become a part-owner of that company. This means that you have a say in how the company is run, and you get a share of the profits if the company does well.
Another benefit is diversification. When you own shares in multiple companies, you spread out your risk. This means that if one company isn’t doing well and their shares decrease in value, your overall portfolio won’t be affected as much because you still own shares in other companies.
However, owning stocks also comes with some risks.
One of the biggest risks of owning stocks is that the value of the stocks can go down. If a company isn’t doing well and is losing money, the value of the shares can decrease. If you decide to sell your shares when their value has gone down, you might lose money instead of making a profit.
Also read: 7 Investment Mistakes to Avoid – Lessons from Seasoned Investors
Another risk is that the company might not pay out any profits at all. Companies aren’t required to pay out dividends (a portion of the company’s profits) to shareholders, so even if the company is doing well, they might decide not to pay out any profits.
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Initial Public Offering (IPO)
Now, you might be wondering how you can buy shares in a company. There are a few different ways to do this. You can buy them directly from a company through what’s called an initial public offering (IPO), or you can buy on a stock exchange, like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) but of course through a broker. When you buy on a stock exchange, you’re buying them from other investors who are selling them.
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