Groww Digest

6 Day Course

Topic: creation of shares

Aug 8 to Aug 14, 2022

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Day 1: Monday
6 Day Course | Theme: creation of shares

Shares of any company are created and

destroyed.

In this week’s course, we’ll learn how and

when shares are created and destroyed - and
why.

When a company is incorporated a certain

number of shares are created.

Every company - whether it is publicly listed

on the stock markets or privately held by
individuals, has shares.

During incorporation, the total number of

shares are defined.

The number of shares owned defines who

owns what percent of a company.

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Day 2: Tuesday
6 Day Course | Theme: creation of shares

Let’s say a company has a total of 1 lakh

shares.

The founder owns 70,000 thousand shares.

The rest are owned by the employees. So, the
founder owns 70% of the company.

Now, let’s say the company wants to get some

money for future expansion and it doesn’t
want to take a loan for it.

The founder can sell some of his/her shares

and reinvest it in the company.

Or, the company can create new shares and

give it to the investors.

From the example above, if 20,000 shares are

created and given to investors, the total
shares available becomes 1.2 lakhs.

The founder’s and employees’ shares remains

the same but ownership percentage reduces.

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Day 3: Wednesday
6 Day Course | Theme: creation of shares

In most cases, when a start up raises money

from institutional investors (venture
capitalists, angel investors, private equity
investors, etc), it does so by creating new
shares.

The new shares are given to the investors and

the money becomes the company’s money.

If the founders or any existing owners of

shares simply sell their shares to other
buyers, no new shares are created but the
ownership changes hands.

An IPO is a process where new shares of a

company are created and sold to share
market investors for the first time.

Page: 4
Day 4: Thursday
6 Day Course | Theme: creation of shares

In addition to IPO, companies also create

shares during FPOs (Follow-on Public Offers).

FPOs are like IPOs: companies create new

stocks and give them to investors to raise
money. The only difference is that IPOs are
done by unlisted companies while listing and
FPOs by existing listed companies.

Companies also create shares when they

issue bonus shares.

For example: a company gives 1 bonus share

for every 5 shares. So in this case, an investor
with 1000 shares will get 200 more shares
from the company.

Shares are also created to give to employees

in the form of Employee Stock Ownership
Plans (ESOP).

Page: 5
Day 5: Friday
6 Day Course | Theme: creation of shares

Since we’ve spoken of share creation, let’s talk

of share destruction.

One of the most common instances, when

shares are destroyed, is when a company
does buybacks.

Buyback is a process by which a company

buys back some shares from investors in the
share markets and destroys them.

Since the company’s fundamentals remain the

same (the revenues, profits, etc) and the total
number of shares has reduced, the price per
share usually goes up.

Page: 6
Day 6: Sunday
6 Day Course | Theme: classification of shares

We’ve reached the end of this week’s course that

started on Monday.

Here’s a test you should take. Get pen and

paper!

Question 1:
Do companies that are not on the share markets
have shares?

-Yes, every company has shares

-No, shares are created when a company lists on
the share markets

Question 2:
Can companies create new shares to raise
money even without an IPO?

-Yes
-No

Page: 7
Day 6: Sunday
6 Day Course | Theme: classification of shares

Question 3:
If new shares are created, what happens to the
ownership percentages of the founder?

-Ownership percentage increases

-Ownership percentage stays the same
-Ownership percentage reduces

Question 4:
Which happens first in a company's life cycle?

-IPO
-FPO

Question 5:
When are shares destroyed?

-Buyback
-IPO

Page: 8
Day 6: Sunday
6 Day Course | Theme: classification of shares

Answers:

Q1: Yes, every company has shares;

Q2: Yes;
Q3: Ownership percentage reduces;
Q4: IPO;
Q5: Buyback.

Page: 9
 That’s it for this week!

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See you next week!

—Groww Digest Team

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