Types of Shares-Meaning of Shares

Contents

Toggle

Types of Shares

It is common for businesses to have multiple classes of shares, each of which confers special rights on shareholders, including voting power and the right to dividends or capital.

As defined in the Companies Act 2013, a share is a unit of measurement for a shareholder’s interest in a business’s assets. In other words, shares represent a shareholder’s ownership stake in a company.

Stocks are a way for public limited companies to raise capital for their business. Apart from ownership rights, these shares come with many other benefits. Certain types of claims confer voting rights, priority dividend rights, a percentage of the company’s surplus profits, and a share of the company’s losses, among other benefits.

A feature that all types of shares have in common is the right to dividends, which a company pays out of its profits.

What is the Share

A share is a unit of ownership in a corporation. Shareholders are entitled to receive any profits earned by the business in dividends. Additionally, they bear the brunt of any losses incurred by the industry. If you are a shareholder in a business, you own a percentage of the issuing company in proportion to the number of shares you purchased.

Types of Shares

1. Equity Shares
2. Preference Shares

1. Meaning of Equity Shares

These are also referred to as common shares and account for most of the shares issued by a particular company. Equity shares are transferable and are actively traded on stock exchanges by investors. As an equity shareholder, you are not only entitled to vote on corporate matters but also to dividends.

However, these dividends are not fixed. Equity shareholders also share in the company’s losses, up to the amount invested. Further sub-divisions of equity shares include the following:

• Share Capital
• Definition
• Returns

1. Classification of Equity Shares by Capitalization

Here is a breakdown of how equity shares are classified according to their share capital:

1. Authorized Share Capital: Each company’s Memorandum of Associations must specify the maximum amount of capital raised through the issuance of equity shares. However, the limit can be increased upon payment of additional fees and upon completing specific legal procedures.

The term “Issued Share Capital” refers to the portion of the company’s capital that has been made available to investors through the issuance of equity shares. For instance, if one stock has a nominal value of Rs 100 and the company issues 20,000 equity shares, the company’s issued share capital will be Rs 20 lakh.

2. Subscribed Share Capital: The portion of the issued capital that investors have subscribed to.

3. Paid-Up Capital: This is the number of money investors pay for holding the company’s stock. Because investors make a single payment, subscribed and paid-up capital refer to the same amount.

2. Classification of Equity Shares in Accordance with the Definition

Consider the following classification of equity shares in light of the definition:

1. Bonus Shares: The term “bonus shares” refers to additional shares issued to existing shareholders for free or as a bonus.

2. Rights Shares: The term “right shares” refers to a company’s ability to issue new shares to existing shareholders – at a fixed price and within a specified time frame – before offering them for trading on stock exchanges.

3. Sweat Equity Shares: If you have made a significant contribution to the company as an employee, the company may compensate you by issuing sweat equity shares.

4. Voting And Non-Voting Shares: While most shares carry voting rights, the company may issue shares with differential or no voting rights.

3. Returns-Based Classification of Equity Shares

The following table summarises the various types of shares based on their returns:

1. Dividend Shares: A corporation may elect to pay dividends by issuing new shares on a pro-rata basis.

2. Growth Shares: These are shares that are associated with companies that are experiencing rapid growth. While these companies may not pay dividends, the value of their stock increases rapidly, providing investors with capital gains.

3. Value Shares: These are shares traded on stock exchanges at a discount on their intrinsic value. Investors can anticipate that prices will appreciate over time, providing a more favorable share price.

2. Meaning of Preference Share

Compared to ordinary shareholders, preference shareholders receive a higher proportion of a company’s profits. Additionally, in a company’s liquidation, preference shareholders receive payment first. The various types of shares included in this category are as follows:

• Cumulative And Non-Cumulative Preference Shares
• Participating/Non-Participating Preference Shares
• Convertible/Non-Convertible Preference Shares
• Preference Shares, Redeemable/Irredeemable

1. Cumulative And Non-Cumulative Preference Shares: If a company does not declare an annual dividend, the benefit is carried forward to the following fiscal year. Non-cumulative preference shares do not include the right to receive outstanding dividends.

2. Participating/Non-Participating Preference Shares: Participating preference shares entitle shareholders to a portion of the company’s surplus profits after paid dividends. It is in addition to dividends received. Apart from the regular receipt of dividends, non-participating preference shares do not provide these benefits.

3. Convertible/Non-Convertible Preference Shares: Convertible preference shares may be converted into equity shares upon compliance with the company’s Articles of Association (AoA) requirements, whereas non-convertible preference shares do not provide this benefit.

4. Preference Shares, Redeemable/Irredeemable: A company may repurchase or claim redeemable preference shares at a predetermined price and time. These shares have no maturity date. On the other hand, irredeemable preference shares are not subject to such restrictions.

Final Thought

For any individual investor, investing in stocks can be an excellent way to generate long-term wealth. Stocks give you the option of investing in various sectors and industries, thereby diversifying your portfolio and mitigating risk.

Types of Shares

Thank you very much for reading this article. If you need any information related to this article, you can tell us through the comment box. Do share this article with your friends or relatives. Thanks once again.