Finance Over Coffee: Understanding Stocks and Shares

Episode 1: The Basics of Stocks and Shares

At a cozy cafe on a weekend evening around 10, three friends—Kandola, Gupta, and Dubey—settled into their favorite corner table. Having just graduated from college and started their new jobs, they often found themselves facing new challenges and opportunities. This time, their conversation turned to investments and the stock market.

The Concept of Stocks

Kandola, the tech-savvy one, began, “Alright guys, imagine you start a company. This company is like a big pie, and you own the whole pie, which is 100%. Let’s say this pie is worth ₹1 crore. Now, if you need more money to grow your business, you can sell pieces of this pie, which are called shares.”

Gupta, always curious, asked, “How do you decide how much of the pie to sell and at what price?”

Kandola explained, “Good question! Let’s break it down. First, you decide how much money you need. Suppose you need ₹20 lakhs to expand. You then decide what percentage of your company you’re willing to sell to get that money. If you decide to sell 20% of your company, that means you’re selling a portion of the pie worth ₹20 lakhs out of the total ₹1 crore.”

Setting the Share Price

Dubey, trying to understand, asked, “How do you figure out the price for each piece?”

Kandola continued, “Now, you decide how many shares to issue. Let’s say you decide to issue 20,000 shares. The price per share would be the total amount you want to raise divided by the number of shares. So, ₹20 lakhs divided by 20,000 shares means each share is priced at ₹100.”

Gupta added, “So, by setting the share price at ₹100 and issuing 20,000 shares, you’re giving investors a way to own a piece of your company for ₹100 each.”

Kandola nodded, “Exactly. This way, anyone who buys these shares becomes a shareholder and a part-owner of the company.”

Becoming a Shareholder

Dubey, thinking about this, asked, “So, if I buy some of these shares, what does it mean for me?”

Kandola explained, “Let’s say you decide to buy all 20% of the shares, which is 20,000 shares at ₹100 each. You would invest ₹20 lakhs in the company. By buying these shares, you become a part-owner of the company. Your ownership percentage is 20%.”

The Impact of Company Growth

Gupta, looking ahead, asked, “What happens if the company does well?”

Kandola explained, “If Rohan’s company performs well and its valuation increases to ₹5 crore, the value of your shares will also increase. Since you own 20% of the company, your investment will now be worth 20% of ₹5 crore, which is ₹1 crore. So, your initial investment of ₹20 lakhs grows as the company grows.”

Dubey, seeing the potential, said, “That’s quite an increase in value! So, investing in shares can really pay off if the company does well.”

Majority Ownership

Gupta, thinking strategically, asked, “What if I buy more than 50% of the shares? What happens then?”

Kandola smiled, “If you buy 60% of the shares, you become the majority owner. This gives you significant control over the company, including the power to make major decisions, like appointing or removing the CEO.”

Gupta asked, “So, I would have the final say in most company matters?”

Kandola confirmed, “Yes, as the majority shareholder, you would have the final say in most decisions, especially those that require shareholder approval. It gives you a lot of influence over the company’s direction.”

Stocks vs. Shares

Dubey, still thinking about it, asked, “What’s the difference between stocks and shares?”

Kandola clarified, “Good question! ‘Stocks’ is a general term for ownership in any company, while ‘shares’ refer to the specific units of stock in a particular company. When you say you own stocks, it means you have shares in one or more companies.”

Conclusion

As the conversation continued, the friends realized the immense potential and responsibility of investing in stocks. Their discussion turned into an enlightening journey into the world of finance and investments.

Kandola concluded, “Investing in stocks can be a powerful way to grow your wealth, but it also comes with risks. It’s important to do your research and understand the company you’re investing in.”

Gupta agreed, “This has been really informative. I feel much more confident about exploring investments now.”

Dubey added, “Same here. It’s like opening a whole new world of financial opportunities.”

As they wrapped up their discussion, Gupta grinned and said, “Kandola, since you have so much knowledge about stocks, why don’t you take care of the bill today?”

Kandola laughed, “Nice try, Gupta, but knowledge doesn’t always come with free coffee!”