Before we go into the financial world of shares; think, where do we use the word “share” in our day-to-day life.
When we cut birthday cake/have lunch with friends, we often use the word share. We SHARE lunch with friends/colleagues, we SHARE birthday cake.
When we SHARE pizza with our friends and say, its your share and you have to finish it off. What does it mean, it means, he has part ownership on that entire pizza.
Think of this entire Pizza as Capital and a slice as shares.
Let’s use this analogy in the financial world now;
Case 1 — Say for example, Mr. X invests $1000 in a business. Amount invested by him to start a business or to expand is called as Capital.
So, Mr. X is starting a business with a capital of $1000.
In this case, whatever profits Mr X makes, all profits will be kept by him as he is the only one owner.
Case 2 — Say for example, Mr X wants to expand his business. He is in need of $1000 more. He raises capital through his friend Mr. Y this time. So, now this company is owned by both Mr. X and Mr. Y.
If this company makes $100 profits. Mr. X will take 50 and Y will take 50. So, they are partly owning the company now and they are SHARING the profits as they both have invested in the Capital.
So, SHARES represents part ownership in the capital of a company.
