Introduction to stocks and shares

Stocks or securities are generic terms that stand for instruments of ownership like shares, as well as instruments of lending like debentures, which are issued publicly.  Just as a share represents the smallest unit of ownership, a debenture or a bond represents the smallest unit of lending.  Shares and debentures may be of various kinds.

An ordinary share represents the form of fractional ownership in which a shareholder (one who holds ordinary shares), as a fractional owner, undertakes maximum entrepreneurial risk associated with a business venture.  This risk has several dimensions.  During the life of a business, in general, an ordinary shareholder receives dividends out of operating surplus.  This surplus is the residual from the revenue, after subtracting all the operating expenses, the interest charges on all kinds of borrowing, various taxes, and dividends due to the non-ordinary shareholders.  Now, various economic factors, government policies, market conditions, the labour situation, management’s efficiency, etc. may affect revenues, expenses, interest, taxes, etc. in such a way that in any given period, there may or may not be adequate surplus left for ordinary shareholders.  Again, even when a business it at the verge of closing, all other stakeholders, such as employees, creditors, lenders, government, preference shareholders, etc. must be paid their claims first and only the residual can be shared by the ordinary shareholders.  Then, for various reasons, there may or may not be enough residual left for the ordinary shareholders are the last to receive their claims.  In this sense, ordinary shareholders are exposed to the highest risk amongst all the stakeholders in a business.  If they are lucky and times are good, a big surplus may be left for them; if  not, they may suffer a loss.  It is this possibility of variation in their earnings, which constitutes the entrepreneurial risk.  And since the ordinary shareholders undertake this risk, they reasonably look forward to being compensated for this risk in the long run through higher earnings.

Also, in view of the entrepreneurial risk assumed by them, ordinary shareholders have a voting right in proportion to the number of shares held by them, they may exercise this right to shape the affairs of the company in a suitable manner.  The vote is usually exercised on resolutions placed before the company, in their Annual General Meetings or Extraordinary General Meetings.

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