Understanding Stocks and Exploring Its Different Types

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Stock trading has been revolutionised by technology, offering investors fast and reliable solutions. With online platforms provided by stock brokers in India, trading and investing can be done conveniently from anywhere. Understanding shares is essential for navigating the stock market, as they serve as key assets for trading. To begin trading, opening a Demat account alongside a trading account is necessary. Share India offers free Demat and trading account openings, making the process simple and accessible. However, before diving into trading, it’s crucial to familiarise oneself with shares and the various types available in India.

Defining Shares 

A share is a unit representing a partial ownership stake in a listed company. Investors who own them are called shareholders. There are two major types of shares in the market–common shares and preferred shares. Both provide the company with funds, and both give shareholders the benefits of ownership in the company.

Types of Shares

There are two types of shares–equity and preference shares. 

  • Equity shares provide ownership and voting rights, offering the potential for higher returns but with higher risk.
  • Preference shares offer fixed dividends and priority in dividend payments and capital repayment, providing stability but lower returns compared to equity shares.

Equity shares can be classified based on various attributes such as voting rights, dividend payment preferences, and conversion options. Some common types of equity shares include:

  • Ordinary Shares: These are the most common type of equity shares, entitling shareholders to voting rights and a share in the company’s profits through dividends.
  • Cumulative Preference Shares: These shares accumulate unpaid dividends if the company is unable to pay them in a particular year. The accumulated dividends must be paid before any dividends can be distributed to other shareholders.
  • Non-Cumulative Preference Shares: Unlike cumulative preference shares, these shares do not accumulate unpaid dividends. If the company skips paying dividends in a particular year, shareholders of non-cumulative preference shares do not have a claim to those dividends in future years.
  • Redeemable Preference Shares: These shares can be redeemed by the company after a specified period, providing flexibility in managing the company’s capital structure.
  • Convertible Preference Shares: These shares can be converted into equity shares after a predetermined period or under specific conditions, allowing shareholders to participate in the company’s growth potential.
  • Participating Preference Shares: Shareholders of participating preference shares are entitled to receive additional dividends beyond the fixed rate if the company’s profits exceed a certain threshold.

Importance of Investing in Shares

  • One significant reason for investing in shares is the potential return offered by the stock market. Investors can compare this return with other investment options to determine the most suitable choice. Whether aiming for long term growth or short term gains, investing in shares offers flexibility aligned with financial goals.
  • Additionally, investing in the stock market helps to combat inflation. With the inflation rate typically in the mid-single digits in India, the long term average gain of the stock market, such as the Nifty, averages around 12%. Moreover, investing in stocks can generate passive income through quarterly dividends distributed by profitable companies to their shareholders.

Buying Shares

  • To purchase shares, start by opening a Demat and trading account with a broker like Share India. 
  • Next, conduct thorough research on the stock and the company. 
  • Once a suitable stock has been identified one can check its current market price and decide on the number of shares and the required investment amount. 
  • Add funds using various payment methods like UPI, net banking, credit cards, or debit cards. 
  • After adding the necessary funds, proceed to select the desired number of shares and complete the purchase through the chosen broker’s online platform.
  • Finally, monitor all activity in the Demat account through the broker’s app or website.

Conclusion

Equity and preference shares possess distinct characteristics and benefits, appealing to different types of investors. While equity shares offer ownership in a company and voting rights, preference shares prioritise dividend payments and capital protection. Understanding these differences is crucial for making informed investment decisions tailored to one’s financial goals and risk tolerance. Additionally, exploring research and analysis reports can provide valuable insights into company performance, aiding in the selection of suitable stocks. Consider investing in defensive stocks renowned for their resilience during economic downturns, offering stability amidst market volatility or recessionary pressures.

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