How do shares come into being?

 

Any business is owned either by a single promoter or joint promoters with an unlimited liability, or a group of people (both promoters and non-promoters) with a limited liability. Limited liability means, in case of bankruptcy of the company, the owner's liability will be limited to the extent of their individual contribution towards capital. These three forms of the business organizations are called proprietorship, partnership firm and limited company respectively

Since each owner has his own share of contribution towards the owner's capital (also called equity), each of them is given his legal entitlement to share the ownership of the company in the form of document. These documents are rightly called shares and the owners are shareholders. A limited company is either called a public limited or a private limited company depending on its turnover and number of members in its board. Among public limited companies, the companies with their shares widely held are listed in the stock exchanges, and the shares of only these limited companies are traded.

All public limited companies are started privately by a promoter or a group of the promoters. But, the promoters' capital and the borrowings from banks and financial institutions are not sufficient for financing the project or setting up a business. So, these companies invite the public also, to contribute towards the equity and issue shares to these individual investors through initial public offering (IPO). A company is run by a Board of Directors - who are shareholders' nominees - but are generally controlled by the promoters.