Shares and why companies sell them
A share (also called stock or equity) is a unit of ownership in a company. If a company has 1,000 shares and you own 10, you own 1%.
Shareholders can earn in two ways:
- Dividend: part of the profit paid out to owners.
- Capital gain: selling the share for more than you paid.
They may also vote at the annual general meeting. Companies sell shares to raise money for growth without taking a loan.
Primary market (IPO) and secondary market
Primary market: new shares are sold for the first time. The first public sale is an IPO (initial public offering). Money goes to the company.
Secondary market: existing shares are traded between investors on a stock exchange (NSE, BSE, NYSE, Nasdaq, LSE, Warsaw Stock Exchange). The company gets no new money, but investors can easily turn shares into cash (liquidity).
Who is involved: regulators, brokers, depositories
- Regulator: makes rules, checks companies tell the truth, punishes fraud (SEBI in India, SEC in the USA, the financial supervision authority in other countries).
- Stock exchange: the marketplace and its computer matching system.
- Broker / trading member: a firm allowed to trade on the exchange for clients.
- Depository: keeps shares in electronic form; you hold them in a demat account (NSDL and CDSL in India).
- Clearing corporation: makes sure the buyer gets the shares and the seller gets the money (settlement).
How the price is set: orders and the index
Buyers place bids, sellers place asks. The exchange matches them in the order book. A market order trades at once at the best price; a limit order trades only at your price or better. More demand than supply → price rises; more supply → price falls.
Prices react to company profits, news, interest rates and the economy.
A stock index tracks a group of shares: Sensex, Nifty 50, S&P 500, FTSE 100, WIG20. A bull market rises for a long period; a bear market falls.
How investors choose shares
Fundamental analysis: study the business, profits, debt and ratios such as P/E (price ÷ earnings per share). Technical analysis: study price charts and trading volume. Many beginners practise with a simulated (paper) portfolio before using real money.
Instruments, funds, risk and behavioural traps
- Money-market instruments (under 1 year): treasury bills, commercial paper, deposits. Low risk, low return.
- Capital-market instruments (over 1 year): shares, government (treasury) bonds, corporate bonds.
- Alternative: gold, property, commodities, crypto-assets (very risky).
Investing alone: you pick shares and bonds yourself; cheaper, but needs time and skill. Through funds (mutual funds, ETFs, index funds): you buy units; a manager or an index spreads money over many assets. Easier diversification, but fees.
Risk and return: higher possible return comes with higher risk. Diversify across companies, sectors and asset types, and invest for the long term.
Behavioural traps
- Herd behaviour: buying because everyone else is.
- Panic selling after a fall; FOMO buying after a big rise.
- Overconfidence and trading too often.
- Loss aversion: holding a losing share too long to avoid admitting a loss.
- Believing "hot tips" and get-rich-quick promises.
Try it
Make a paper portfolio of ₹10,000 (or €100) split across 4 companies from different sectors. Record the closing price every Friday for a month and calculate your gain or loss. Did the diversified total move less than the single most volatile share? Then use the 3D slider to see how buyers and sellers move a price.
Key formulas and definitions
- Ownership % = your shares ÷ total shares × 100
- Gain = (selling price − buying price) × number of shares
- Return % = gain ÷ amount invested × 100
- Dividend yield % = dividend per share ÷ share price × 100
- P/E ratio = share price ÷ earnings per share
- Market capitalisation = share price × number of shares
Worked examples
1. A company has 50,000 shares. Riya owns 500. What percentage does she own?
500 ÷ 50,000 × 100 = 1%.
2. You buy 20 shares at ₹150 and sell at ₹180. You also got a dividend of ₹5 per share. Find total gain and return %.
Capital gain = (180 − 150) × 20 = ₹600. Dividend = 5 × 20 = ₹100. Total = ₹700. Invested = 150 × 20 = ₹3,000. Return = 700 ÷ 3,000 × 100 ≈ 23.3%.
3. A share costs €40 and earnings per share are €2.50. Find the P/E ratio. Another firm in the same industry has P/E 30. What might this suggest?
P/E = 40 ÷ 2.5 = 16. Investors pay 16 times yearly earnings. The firm with P/E 30 is more expensive relative to profits: investors expect faster growth, or it may be overpriced. P/E alone is not enough to decide.
Common mistakes
- Thinking the company gets money every time its shares are traded. Only in the primary market (IPO or new issue).
- Putting all savings into one "hot" share.
- Assuming a share that fell a lot must rise again soon.
- Confusing shares (ownership) with bonds (a loan you give that pays interest).