What is a Share:
Let's talk about
the Stock Market or Share Market. So what is this "Share" in the
market? As per definition, "Units of equity ownership in a corporation are
shares."
Let's simplify. Suppose there is a company A. A has a sum of 100 shares. Now all of the shares are initially owned by the founder. With time, the founder wants to raise a fund of x amount. In return of the amount the founder will offer some portion of the company. This portion of the company is the share of the company the founder is offering the buyer in return for money. The person or group offering money in exchange for shares is called the investor. So now the investor owns a percentage of the company A with the founder.
Thus, investors own the units of equity in company A.
But why will someone give money in exchange for some portion of the corporation?
Well, with shares in a growing company, you can easily grow your money. Not just growing money, this can also help as a financial asset as in case of any declaration of dividends. (Dividends are the distribution of the residual profits of a company among the shareholders. They are generally given by established companies or corporations when they no longer need to use profit for growth, expansion, marketing, etc.)
But let say company is in growing stage and cannot pay dividends. In that case shares a company with time.(The process of analyzing the worth of a stock or company is called valuation. (More in other blogs...)
Large equity in a
company or large share of a company enables the rights of voting in the
important meetings and give a power of decision making for the companies future
ventures.(Voting is generally done on an opinion or proposal in a meeting. This
can include voting for a candidate for office or voting for some
decision-making about future ventures in marketing, capital raising, etc.)
So buying a share
of a growing company can help you grow your money and reach your financial
goals.
Takeaway: A
company's share is not like debt. That is, it is not mandatory to be repaid to
the investor.
Who will the owner
and founder sell the shares of the company to?
or
Who is the investor?
Let's suppose you
are the founder. Initially, all the shares of the company are held by you and
your partner (if any).
As your company
starts to grow, you will need money for expansion. Now is the time you will
seek money from the primary market (friends, family, angel investors, or
venture capitalists (VC)).
Now, you have
successfully raised money, but you still need some. You can go for round 2 or
A-round. This will dilute your shares and your primary investors' shares to
make room for investment in this round. Still need investment? Don't worry, you
can go for rounds B and C, etc., until you need investment. Should you keep
diluting your share? The answer can be yes or no. It finally depends on you
that-is the founder.
You successfully
raised investments, your company is doing well, and you finally think "the
time has come." You can finally go for an Initial Public Offering
(IPO). (An IPO is the process of offering shares of your private
corporation to the general public for the first time.) Now you are open to
anyone and everyone. You meet the requirements of the stock exchange and go
public.
But, what if you
cannot buy a significant amount of shares as you may not have a lot of money
lying around?