post 8
Dated8/5/2020
What is a Share
snippet Today we will discuss the need and significance of securities or shares and bonds

This all starts from the story of Bunty and his Idea to start a company say “Bunty’s Startup”. The estimated capital (money) requirement for his dream company is say rupees 10 lakhs, Bunty has only 3 Lakhs and can-not loose time in setting up a company. What he can do??
first thought we get is to approach a bank for a LOAN but bunty has a credit limit or a maximum loan limit of Rupees 3 Lakhs.. He has now managed to collect 6 Lakhs but still require 4 more.
Now Bunty and Bholla Singh are good friends, Bholla Singh promise him to give 1 Lakh remaining ,not as a loan, but for equity. Here Bunty has sold a part of his New company to Bholla Singh. Bholla Singh paid 1 Lakh hence has paid 10% of the total value of his company which is 10 Lakh. Hence now Bholla singh is a shareholder or a partial owner of 10% of Bunty’s Company.
Now Bunty still needs 3 lakhs more so he approach several more investors to whom he issues shares of his company and make them partial owners and share holders.
Now since Bunty does not have a Full ownership of his company so he can not enjoy all the profits alone but have to share the profit as per the share holding perentage. So Bholla Singh gets 10% of total profits and Babla also gets 10%. Same goes for everyone with their respective holdings. This profit is Called Dividend.
But wait Bunty can counter Loss also in that case the losses will also be divided similar to profits,
but what about that loan that Bunty Took?? the bank wont see wether Bunty is in profit or in loss, Bank would want it’s money back with interest
so this is the basic difference of a Debt( the one like Loan) and Equity(shares) instruments.
If I am an investor and I am willing to share profits of a company at the risk of facing losses too, I will invest in Equity segments or Shares.
But if I am person who isn’t a Risk taker,,I will go with investing in debt instruments like Bonds and debentures.
The equity investments have an unlimited scope as compared to a Debt instrument because even if a company touches sky and generates huge profits, The interest at a debt instrument would be payed as fixed on the issuing norms, whereas the shareholders will share that huge profits and return with stuffed pockets.

Now shares are traded on a stock Exchange after their First Issue, Their price is defined in three categories .
Every Share or a Bond has a Face Value, or the Value which corresponds to stake in company.

  1. If the Security (we refer to equity and debt collectively as securities) is being traded lower than it’s face value the it’s said to be sold at discount
  2. If the security is sold at a value equal to the face value then it’s said to be sold at par
  3. If the security is sold at a value greater than face value then it’s said to be sold at premium

but wait why does the price fluctuate from the Face Value???

let’s go Back to the out favoutrite Bunty, Say Bholla singh want his money back but bunty isn’t ready to buyback his shares. So Bholla Singh comes to me and I have interest in Bunty’s Company (Due to large Profits he is generating) and I am willing to enter the shareholding. But Bholla Singh has shares, and I am now his customer. Bholla singh Wants amount of 1.25 Lakhs for the stake of 10% of Bunty’s Company of 10 Lakh because Bunty is in profit. We crack the deal and now I have brought the Shares at premium due to the Reputation of Bunty’s Company

This is how news related to a company changes it’s supply demmand and regulates it’s price.

Tommorow We will hack into Life of BUNTY to find out how he can list his company on a stock Exchange

disclaimer Bholla SIngh , Bunty, Babbla , Laddoo are not fictional Charaters but my Friends, Who might get offended after reading this, But they are cool people. :):)..

Happy Learning