A listed company divides its capital into units of equal denomination to list on the stock exchanges. In financial market, each such unit is called share or stock. These units are offered for sale to raise the equity capital.
An investor who holds the shares of a company becomes a shareholder or one of the owners of the company. Thus share is termed as unit of equity capital.
We have mentioned the significance and the importance of issuing shares in our corporate finance part. Shares are issued to raise capital from market and the raised capital will come under the equity capital part of liabilities section in the balance sheet. This is termed as liabilities because this is an obligation to the equity shares owners and the owners want to receive the return on their investment.
The equity shareholders have the least preference on the assets of the company at the time of liquidation which makes the equity investment more risky than the debt and the preference share investment. That’s the main reason the equity shareholder expects more return to compensate the extra risk.
New shares are issued in the primary market through the Initial Public Offer (IPO) process and the more shares (already available listed on the exchange) are issued through the Follow-on Public Offer (FPO) process. The shares are traded on the secondary market or the exchanges which act as the mediator between the sellers and the buyers. The trading mechanism is explained later.