Explaining with an example,
How does the Share Market works....
Suppose i want to start a business. I need 1000 rupees for that, but i only have 600 with me. I offered my friends to be partner in my business. Two of them- F1 & F2- and they contribute 200 each. Our business takes off and, by virtue of our respective contributions, my share in the business is 60%, while F1 & F2 both holds 20% each.
Here, Rs.1000 is Equity capital of our business.
Our Business is running cool and now we want to expand it. We want to double the equity capital of our business so that we may increase our production. Thus we need Rs. 1000 more. This time we don't ask individually, we just spread the word around thet we planning to expand and everyone is welcomed to contribute. This is called Public Offering.
Ten Gentlemens came forward with Rs. 100 each. Thus Each of them becomes a Shareholder of the company, holding 5% share each (100*2000/100). If we divide the Rs. 2000 Equity into 20 parts of Rs.100 and call each part a Share, then every gentlemen holds 1 share of the company, while i hold 6 shares (I had contributed 600 in the beginning, remember?)
For all practical purposes, a shareholder is an owner of the company to the extent of his shareholding. The gentlemens holding 5% shares will receive 5% profit of the company as Dividends when the same are given out. In all major decisions involving the running of the business, each shareholder has voting rights and the weight of there vote is in accordance with their shareholding.
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