Types of Shares & Their Importance

In business, a share indicates a shareholder’s ownership of a company’s assets. Stocks reflect a shareholder’s part of the company’s ownership. To raise capital for its business, a public limited company may issue stock. In addition to their ownership rights, these shares come with a number of other privileges. Different types of shares grant specific rights, such as the right to receive dividends first, to share in the company’s earnings and losses, and so on.

Dividends are paid out of profits and are a common feature of all types of shares.

Types of Shares

There are two types of shares available.

  • Ordinary shares
  • Preference shares

There are significant distinctions between the two types of shares, including their separate profit shares, voting rights, and capital settlement at the moment of winding up or liquidation.

Ordinary Shares

Ordinary shares are the shares of a corporation that give the shareholder the right to vote at the corporation’s annual meeting and earn dividends from its profits. Ordinary shares are what they’re called.

A single share normally means one vote in terms of voting rights, which could be related to business policy or the election of directors. Corporations, on the other hand, have the ability to change the ratio of shares to votes.

Ordinary shareholders share in a company’s losses to the degree that their shareholding in the company allows. Equity shareholders are given these rights because of their stake in a company’s ownership and representation of its equity.

Ordinary shares can be grouped into two categories in terms of share kinds. The first is founded on definitions, whereas the second is founded on traits.

Also Read: What is a share’s face value?

Ordinary Shares Classification – Definition Based

Authorized share capital

The company’s authorized share capital is the maximum number of shares that it is allowed to issue to shareholders under its charter documents. An authorized capital share is what these shares are called.

The amount of capital that a company can raise through the sale of stocks is specified in the Memorandum of Association (MoA). For example, if a business’s Memorandum of Organization specifies that it is only permitted to issue shares with an outstanding value of Rs.50 crore, the firm is not permitted to issue shares in excess of that amount. The MoA does not, however, prevent a corporation from later changing its authorized share capital.

Issued share capital

A corporation’s issued share is one that has been allotted to its stockholders for their usage. An issued capital share is the name for this sort of stock. The issuance of shares is a method of raising funds through the issuance of securities. Yet, it’s vital to remember that issued share capital only refers to the notional value of all the company’s ordinary shares. If a company’s nominal capital is Rs. 10 and it has issued 50 lakh shares in the market, its issued capital is Rs. 5 crores.

Also Read: In the stock market, what is MTM?

Subscribed capital and paid-up capital

The share of issued capital that has been sold to the public is known as subscribed capital. Subscribed capital is the term for this form of capital. Investors have subscribed to a certain percentage of the issued capital. Investors do not always purchase all of a company’s shares when it is issued.

The amount of money a firm has received from its shareholders in exchange for stock is known as paid-up capital. Paid-up capital is the term for this form of capital. The amount of money that investors have contributed to purchase shares is referred to as a company’s paid-up capital. As a result, it has a direct relationship with the amount of capital raised by a company through equity issuance.

Ordinary Shares Classification – Feature Based

Voting shares and Non-voting shares 

A voting share is a stock that gives you the right to vote on topics of corporate policy. Voting shares are the name given to such shares. These voting shares, as the name implies, give their holders the right to vote on business policies and director elections. Ordinary shares are generally shares with voting rights.

Non-voting shares are shares in a company’s capital that belong to a class that does not have the power to vote. Non-voting shares are the name given to these shares. If the shares do not have voting rights, they may have differential voting rights or none at all.

Sweat equity shares

Sweat equity refers to non-monetary contributions to a firm made by its stakeholders in the form of labor and time rather than cash. Sweat equity shares are awarded in exchange for these contributions. Instead of a monetary value, the shares are exchanged for labor and time. Sweat equity shares are the name for this type of stock. Employees and directors of a firm might be compensated with shares of the company when they perform effectively. Companies retain efficient staff by granting sweat equity shares to them.

Also Read: What’s the Different Between Stocks and Debentures?

Right shares

Right shares are shares that are issued to existing shareholders after the initial public offering, but which have an inherent right to be subscribed to in proportion to their holdings. Right shares are the name given to such shares. This is one of the many different types of stock that businesses issue to their existing shareholders. Existing shareholders have the opportunity to purchase these shares before they are made accessible to the general public.

Bonus shares

Bonus shares are fully paid shares that the corporation gives away free of charge to existing shareholders. Bonus shares are the name given to these shares. Dividends are frequently distributed in bonus shares instead of cash. As a result, existing shareholders are only eligible for bonus shares. Organizations can convert a portion of their retained earnings into equity shares.

Preference Shares

Preference shares, also known as preferred stock, are shares of a company’s stock that pay dividends to stockholders before common stock payments are paid. Preference shares are the name for these types of shares.

When an company is winding down, shares having preference rights are entitled to preferential treatment, such as dividend receipts and capital reimbursements.

Furthermore, preference shareholders are entitled to a set dividend guarantee, whilst regular shareholders are not. As a result, investors seeking low-risk investments may choose to invest in a company’s preference shares.

Preference shareholders, on the other hand, are often not entitled to any gains above their fixed entitlement. As a result, if a corporation boosts its dividend rate after reporting net profits, preference shareholders will not gain; only ordinary shareholders will. Preference shares do not have voting rights. Investors rarely choose preference shares because of these factors.

Also Read: When do you get your intraday profit?

Preference shares Classification

Redeemable and irredeemable preference shares 

The issuing corporation can purchase a redeemable share at a predetermined date or after a specific event. A redeemable share is one that can be redeemed. A redeemable share is one in which the issuing firm and the shareholders agree that the company can repurchase or redeem the shares at a later date, either after a particular period has expired or at a later date. Depending on who can exercise the buyback provision, a redeemable share can be exercised by either the shareholder or the organization.

An irredeemable preference share is one that can only be redeemed in the event of the corporation’s liquidation. Irredeemable shares are those that cannot be redeemed. As a result, irredeemable shares are the polar opposite of redeemable shares.

Convertible and non-convertible preference shares

Convertible preference shares are corporate fixed-income instruments that allow investors to convert them into a specific number of shares of the company’s common stock at a specific period. Convertible preference shares are the name for these shares. Furthermore, shares can be categorised according to whether or not they are convertible.

Non-convertible preference shares are only redeemable for preference shares and are not convertible into equity shares. Non-convertible preference shares are the name for these types of shares.

Participating and non-participating preference shares

Participating preferred shares entitle their holders to dividends equal to the usually stated rate at which preferred dividends are paid to preferred shareholders, plus an additional payout if specific criteria are met. Participating preference shares are one type of share. Holders of participating preference shares are allowed to share in the earnings as soon as a company distributes dividends to its ordinary shareholders. As a result, if a company’s net income is significant, these shareholders will receive a share of the profits.

Non-Participating Preferred Shares are stock that gives stockholders preferential rights or high priority. Such incidents can occur during the company’s dissolution or dividend distributions. Non-participating preferred shares are the name for these shares. Non-participating shareholders, on the other hand, are only entitled to a fixed dividend payout.

Cumulative and non-cumulative preference shares

A cumulative preference share is a standard preference share that comes with a bonus. There is a bonus here: holders of these shares will be entitled to dividends even if the corporation issuing the shares previously failed to pay them. Cumulative preference shares are the name for these shares. If a corporation does not pay dividends in a given year, its dividend entitlement for preference shares is carried forward to the next year as a cumulative stock.

A non-cumulative preference share pays a fixed annual dividend to each shareholder based on the company’s net profits. Non-cumulative preference shares are the name for these shares. When a corporation fails not pay dividends in a given year, the amount of the dividend is not carried forward.

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Frequently Asked Questions

What is the best type of share to purchase?

Because common stock prices are more variable than preferred stock prices, preferred stock shares are less likely to lose value while simultaneously being less likely to gain value. Investors who prioritize income over long-term growth should consider the preferred stock market.

How is the share used?

Investors exchange money for stock in a company or a financial asset, which represents equity ownership. When purchasing common shares, investors may receive voting rights and dividends.

What are the various categories of shareholders?

A company’s shareholders are divided into two categories: common shareholders and preferred shareholders. The owners of a corporation’s common shares are known as common stockholders.

What are the differences between shares and debentures?

A debt symbolizes the company’s debt, whereas a share represents the company’s capital. A share denotes the company’s ownership by its shareholders. Debentures, on the other hand, reflect a company’s debt. Dividend income refers to money gained through stocks, while interest income refers to money generated from debt instruments.

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