Stocks play a vital role in the modern financial system, allowing individuals and institutions to own a share of a company’s capital and participate in its growth and governance. In India, stocks are regulated under a robust legal framework that ensures transparency, investor protection, and market integrity.
What are Stocks? – Meaning and Overview
Stocks (also known as shares or equity) represent ownership interest in a company. When you purchase stocks, you become a shareholder, meaning you own a fraction of that company and are entitled to a share of its profits (dividends) and assets.
Legally, a stock represents a bundle of rights, including voting, dividends, and a claim on residual assets.
Types of Stocks in India
1. Equity Shares (Ordinary Shares)
- Represent ownership and carry voting rights.
- Shareholders earn dividends depending on company profits.
- Commonly traded on stock exchanges.
2. Preference Shares
- Priority over equity shareholders in receiving dividends and capital repayment.
- Usually have fixed dividend but no voting rights.
- Can be cumulative, non-cumulative, redeemable, or convertible.
3. Bonus Shares
- Issued to existing shareholders without any cost, out of the company’s free reserves.
4. Rights Shares
- Offered to existing shareholders at a discounted rate to raise additional capital.
Legal Framework Governing Stocks in India
Stocks and their trading are governed by various Indian laws:
- Companies Act, 2013 – Covers issuance, allotment, buyback, and rights of shareholders.
- Securities Contracts (Regulation) Act, 1956 – Defines securities and regulates stock exchanges.
- SEBI Act, 1992 – Empowers SEBI to regulate securities market.
- Depositories Act, 1996 – Enables dematerialization of shares.
- Income Tax Act, 1961 – Tax implications on capital gains/dividends.
Regulatory Authorities
- Securities and Exchange Board of India (SEBI) – Market regulator ensuring investor protection and transparency.
- Stock Exchanges – e.g., NSE and BSE, where stocks are listed and traded.
- Depositories – NSDL and CDSL hold dematerialized shares.
How are Stocks Issued and Traded?
Issuance Process:
- IPO (Initial Public Offering) – When a company issues shares to the public for the first time.
- FPO (Follow-on Public Offer) – Additional stock issuance by an already listed company.
Trading:
- Done through stockbrokers on platforms like NSE/BSE.
- Requires a Demat account and trading account.
- Settlement occurs through T+1 rolling basis in India.
Rights of Stockholders in India
- Right to receive dividends
- Right to vote on key corporate matters
- Right to attend general meetings
- Right to inspect books and records
- Right to a share in surplus assets in case of company winding up
Key Concepts Related to Stocks
| Concept | Description |
|---|---|
| Face Value | Nominal value of a share (e.g., ₹10). |
| Market Value | Price at which stock is traded. |
| Book Value | Net asset value of the company per share. |
| Dividend Yield | Dividend as a percentage of market price. |
| Capital Gains | Profit from sale of shares at higher price. |
Landmark Case Law
Sahara India Real Estate Corp v. SEBI (2012)
Held that issuance of securities to the public without SEBI’s approval and bypassing listing requirements is illegal. Reinforced SEBI’s authority to regulate the securities market.
Benefits of Investing in Stocks
- Potential for high returns
- Ownership and voting rights
- Liquidity – easily tradable
- Portfolio diversification
- Participation in economic growth
Risks Involved in Stock Investment
- Market volatility
- Risk of capital loss
- Economic or company-specific downturns
- Lack of dividends in loss-making companies
Taxation of Stocks in India
- Short-term Capital Gains (STCG) (held < 12 months): Taxed at 15%.
- Long-term Capital Gains (LTCG) (held > 12 months): Exempt up to ₹1 lakh; 10% thereafter without indexation.
- Dividend Income: Taxable in the hands of the investor.