Understand what a share - stock represents (ownership)

WHY does this matter? Because understanding ownership changes how you think about investing. You're not gambling on prices—you're buying businesses. The stock price reflects what people think your slice of the business is worth today.

What Exactly Is a Share?

Derivation: Ownership Percentage

Start from first principles: A company is a legal entity that can be divided into equal parts.

Step 1: Define total ownership as100% of the company's equity (assets minus liabilities).

Step 2: Divide this 100% into $N$ equal parts called shares. Each share represents $\frac{1}{N}$ of total ownership.

Step 3: If you own $n$ shares, your ownership fraction is: $\text{Your ownership \%} = \frac{n}{N} \times 100\%$

WHY this formula? Because ownership is additive and proportional. If you own 10 shares out of 100 total, you own exactly 10% of everything the company owns, earns, and controls.

$\boxed{\text{Your claim on earnings} = \text{Total company earnings} \times \text{Your ownership \%}}$

$\boxed{\text{Market value of your holding} = \text{Share price} \times \text{Number of shares you own}}$

HOW to use these:

• Formula 1 tells you what fraction of the company you control
• Formula 2 tells you your share of profits (before the company decides what to do with them)
• Formula 3 tells you what the market says your ownership is worth right now

Why Companies Issue Shares

WHAT happens when a company "goes public"?

Companies divide ownership into shares to raise capital without taking debt. Here's the mechanism:

Step 1: A private company decides it needs ₹100 crore for expansion.

Step 2: Instead of borrowing (debt), it creates10 crore shares and sells them at ₹10 each in an IPO (Initial Public Offering).

Step 3: Investors buy these shares. The company gets ₹100 crore. Investors get ownership certificates (shares).

Step 4: These shares can now be traded on a stock exchange between investors. The company doesn't get more money from this trading—but the shares now have a liquid market price.

WHY do this instead of loans?

• No interest payments or mandatory repayments
• Shares spread risk across many investors
• Aligns investor interests with company growth (investors profit only if company grows)

The tradeoff: Original owners (founders) give up some control and must share profits.

Step 1 — Calculate ownership percentage: $\text{Your ownership} = \frac{5,000}{50,000,000} \times 100\% = 0.01\%$ Why this step? You need to know what fraction of the company you own to understand your rights.

Step 2 — Calculate your investment: $\text{Investment} = 5,000 \times ₹200 = ₹10,00,000 \text{ (₹10 lakh)}$ Why this step? This is your capital at risk.

Step 3 — Calculate claim on annual profit: Suppose TechCorp earns ₹500 crore profit this year. $\text{Your share} = ₹500 \text{ crore} \times 0.01\% = ₹500 \text{ crore} \times 0.0001 = ₹5,00,000 \text{ (₹5 lakh)}$ Why this step? This is theoretically your portion of earnings. The company may reinvest it or pay some as dividends.

What you actually own:

• 0.01% of all TechCorp's factories, patents, cash, brand value
• Right to cast 5,000 votes (in most cases, negligible influence)
• Claim on ₹5 lakh of the ₹500 crore profit

Before new issuance: $\text{Your ownership} = \frac{1,000}{1,000,000} = 0.1\%$

After new issuance: $\text{New total shares} = 1,000,000 + 500,000 = 1,500,000$ $\text{Your ownership} = \frac{1,000}{1,500,000} = 0.0667\%$

Why did this happen? The company divided the same pie into more slices. Your number of shares stayed the same, but each share now represents a smaller fraction. This is called dilution.

WHY does this matter? Your voting power and profit share both decreased—even though you didn't sell anything. Always check if companies are issuing new shares.

Step 1 — Calculate book value per share: $\text{Equity} = \text{Assets} - \text{Liabilities} = ₹12 \text{ crore} - ₹3 \text{ crore} = ₹9 \text{ crore}$ $\text{Book value per share} = \frac{₹9 \text{ crore}}{1 \text{ crore shares}} = ₹9$ Why this step? Book value is what each share would theoretically get if the company sold everything and paid debts.

Step 2 — Compare to market price: Suppose RestaurantCo shares trade at ₹50 each. $\text{Market value} = ₹50 \times 1 \text{ crore} = ₹50 \text{ crore}$

Why the difference?

• Market price reflects future earning potential, brand value, growth prospects
• Book value only reflects current assets at historical cost
• Investors are paying ₹50 because they expect the ₹9 of assets to generate profits over time

Key insight: You own the assets (book value) AND the future cash flows those assets will generate.

Common Misconceptions

The reality: Each price movement reflects changing estimates of the company's value. When you buy a share, you're buying:

• Real factories, real employees, real revenue
• A legal claim enforceable in court
• A proportional vote in company decisions

The price volatility doesn't change what you own—it changes what others are willing to pay for it.

The fix: Think "I'm buying 0.01% of this business" not "I'm buying 100 shares." Ask: "Would I want to own this entire company at this valuation?"

The reality: Unless you own >50% of shares (majority stake), you don't control the company. A 0.01% owner has:

• 0.01% of the voting power (effectively zero influence)
• No right to access the office or demand reports beyond public filings
• No ability to fire the CEO or change strategy

The nuance: You have proportional control. With 1 million other shareholders, your vote is one of a million. But collectively, shareholders can replace boards, approve mergers, etc.

The fix: Small shareholders are "along for the ride" unless they organize. You control your buying/selling decision, not the company's operations.

The reality: Share price = what the marginal buyer and seller agree on today. It reflects:

• Current public information
• Investor emotions (fear, greed)
• Liquidity (how many shares are trading)
• Speculation about the future

A company worth ₹1000 crore today might trade for ₹800 crore in a panic or ₹1500 crore in a bubble.

The fix: Share price is an estimate of value, not value itself. The actual value is the discounted sum of all future cash flows—which no one knows for certain.

Rights of a Shareholder

1. Dividend rights: If the company distributes profits, you get your proportional share
2. Voting rights: One share typically = one vote on major decisions (board elections, mergers, etc.)
3. Information rights: Access to annual reports, financial statements, proxy statements
4. Residual claim: In bankruptcy, after creditors are paid, shareholders split what remains (often zero)
5. Preemptive rights (sometimes): First option to buy new shares to avoid dilution

WHY this structure? Shareholders are residual claimants—they get paid last, after employees, suppliers, and lenders. In exchange, they get unlimited upside if the company succeeds.

The Deep Connection: Ownership ↔ Value

From first principles: A company is a machine that converts inputs (labor, capital, raw materials) into outputs (products, services) and generates cash flows.

Step 1: The value of the machine = present value of all future cash flows it will generate.

Step 2: Shareholders own the machine, so the value of all shares = value of the machine.

Step 3: Value per share = Total machine value / Number of shares.

$\boxed{\text{Intrinsic value per share} = \frac{1}{N}\sum_{t=1}^{\infty} \frac{\text{Cash flow}_t}{(1+r)^t}}$

Where $r$ = required return, $N$ = outstanding shares. Note the entire discounted sum (total company value) is divided by $N$ shares.

WHY does this matter? The stock price bounces around this intrinsic value. Sometimes it's higher (overvalued), sometimes lower (undervalued). But over long periods, price converges to value because you actually own the cash flows.

Now you own 1/100th of everything: the table, the juicer, the recipe, and most importantly, 1/100th of the profits. If the stand makes ₹500 profit, you get ₹5.

Later, someone offers to buy your 1 share for ₹20 because they think the stand will do really well. You can sell and take the ₹20, or hold on and keep getting your ₹5 share of profits. That's what a stock is—a piece of a business you can own and sell.

The cool part: even with just 1/100th ownership, you actually own a tiny bit of the table, the lemons, the cash in the box. It's not fake—it's real ownership, just split 100 ways.

Connections

• 1.2.02-Share-certificates-and-dematerialization — How ownership is recorded today (digital vs paper)
• 1.2.03-Difference-between-equity-and-debt — Why shares are riskier but more rewarding than bonds
• 1.3.01-Stock-exchanges-and-their-role — Where shares are bought and sold
• 2.1.01-Dividends-definition-and-types — How companies share profits with owners
• 3.1.01-Market-capitalization — Total value of all shares = company's market cap
• 4.2.01-Book-value-vs-market-value — Accounting value vs market perception

#flashcards/stock-market

What does buying a share actually make you? :: A part-owner of the company with proportional rights to profits, voting, and assets.

Why are shareholders called "residual claimants"? :: Because they get paid last in bankruptcy (after creditors), but get unlimited upside if the company succeeds.

Concept Map

Hinglish (regional understanding)