The concept of investing goes back to around 1700 BC when The Code of Hammurabi provided a legal framework for investment. With time, investing has continued to grow as a lucrative option for businesses and investors and is regarded amongst one of the most popular methods of filling in one’s pockets. A word that is most commonly used when the topic of investment is in discussion is shares. We are always acknowledging the market value of shares, the number of shares issued, outstanding shares and placements.
However, amid this, do we understand what is the worth of shares that one buys and invests in?
Let us dive a little deeper to understand this:
Shares- Types and Features
Shares are synonymous with ownership. They are components of possession interest that offer for an equal distribution of profits by a company, in the form of dividends. In simple words, shares are a portion of larger amount, which is divided amongst several people (shareholders). There are primarily two types of shares- common and preferred, and owners may choose to issue either when a corporation is being established.
However, it has been noticed that most companies issue common share, which comes with voting rights and gives more control to the shareholders hands, while adhering to appreciation and dividends. However, it is riskier than the preferred shares which does not offer appreciation in value or the right to vote in the business firm.
Shares are often characterised by the following features:
Importance of shares
Investing as a practice comes with a hoard of benefits. Besides, being an effective way to make money, investing boosts global businesses and international trade relations. Shares, a vital component of investing and an integral part of economies, have their own set of advantages, and a few of these are listed below:
- Shares are often a source of regular income for the investors.
- Shares are a determinant of the ongoing market trend and they create a wealth effect in the economy.
- For businesses, issuing common shares is a vital method of raising capital and allocating funds for expansion and growth.
- The investment made in the ordinary shares can reap indefinite profits. The possible loss, too, is not a great shocker and is merely limited to the original amount which was initially invested.
- Shareholders have a potential business influence, given their voting and decision-making rights.
Importance of Shareholder Value
The shareholder value is the amount provided to a shareholder of a company because of its Board’s capabilities to boost sales, free cash flow and earnings, which is often followed by growth in the dividends and capital gains for the shareholders.
Shareholders value is an extremely vital concept as its increment soars up the total amount in the shareholders equity section. It is believed that there is no legal duty to maximise profits in the management of a corporation, but it is always an enhancement in the overall business.
The Value of Owned Shares
Conceptually and theoretically, the share ownership in a privately-run business is not easy to evaluate, though it is relatively simpler for the public companies, as they have the price per share widely available on a daily basis. It is always a good idea to check in on the progress being made in one’s investment on a regular basis, as not only would it make one aware of their share valuations, but monitoring investments helps understand the stance of stock exchanges.
Let us understand the methods of share valuation for private and public companies:
Privately Owned Entities
A privately held company or an unlisted company is the business, which is owned either by NGOs, a group of shareholders or company members, and does not offer or trade the company’s stock for the general public on any stock exchange market.
The common valuation methods of privately-owned companies include comparing valuation ratios, the internal rate of return (IRR) method, discounted cash flow analysis (DCF) or net tangible assets. The valuation of shares in private companies is not a rampant affair and takes place to settle a shareholder dispute for inheritance or to calculate the shares value when one plans to exit the business.
Publicly Held Entities
A publicly traded company, or a listed company is the one whose ownership is organised through shares or stock which trade on a stock exchange.
If one owns shares in a public company, the worth or valuation of those shares is bound to cross the investors’ mind. The concept is intriguing especially for those investors who hail from the non-finance backdrop- and find the symbols, forex terminologies and concepts alien in the beginning.
Let’s break down the valuation of shares by foremostly following these share valuation tips:
- To calculate how much a stock shares is worth, investigate the current share price and multiply that value by the number of shares that are owned.
- The ballgame does not end here because the value calculated in the prior step does not tell the whole story, as there would be fees to be paid; the stock prices might change, and market dynamicity’s might affect a proposed sale of shares.
Let us break down the above explained concept, for an easier calculation:
How are the shares performing on ASX?
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