Companies will usually need huge capital to run the business. Such huge capital cannot be contributed by an individual or a small group of individuals. So for raising huge capital for running big business, thousands and lakhs of individuals and institutions will contribute money. So to facilitate the allocation of capital to so many individuals and entities, the total capital required by the company is divided into smaller units called shares.
A share is the smallest unit in which the capital of the company is divided. It can be in the denominations of Rs 1, Rs 2, Rs 5, Rs 10, Rs 100, or anything else. Suppose a company has total capital of rupees 10,00,000. If every share costs rupees 10. Then total number of shares of the company will be 1,00,000. This Rs 10 is called the nominal value, or the face value of the share. This is different from the market price of the share, or the issue price of the share.
Suppose you buy 1000 shares of this company then you will be investing rupees 10,000 (1000 shares X Rs 10 per share) in this company.
Types of Shares
There are two types of shares :
- Preference Shares
- Equity Shares
Preference Shares
These are shares, which get preference over other kind of shares in respect of following things :
- Preferential right to receive dividend.
- Preferential right to receive repayment of capital in the event of winding up of the company
Equity Shares
Equity shares are those shares which are not preference shares. In other words, those shares which do not have any kind of preferential rights while receiving dividends, or for repayment of capital, in the case of winding up.