The world of the share market is a pool of knowledge. In simple words, a share is known as a unit of privilege representing the proportionate capital of a company. The ones who possess or have ownership of the share are known as the shareholder of the company. They are entitled to have an equal claim on the profit and losses of the company proportionately. Various public limited companies also issue shares to raise the capital from the financial market from time to time. The stock exchange is a prosperous financial platform where a public limited company attracts household savings or funds from different interested parties to facilitate or expand the business by issuing a specific set of shares in the open market.
Apart from ownership rights, different types of shares carry a wide array of entitlements. Some important entitlements that a shareholder possesses are voting rights, access to dividends or priority, stake in the company’s additional profits or losses, and many. The one common element of all types of shares is the right to dividend, which is distributed by the company to its shareholders generally out of the profits.
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Classification Of Shares
As per the Indian Companies Act 2013, shares of the company classified into two major types namely, equity shares and preference shares.
It is also referred to as ordinary or regular shares of the company. Equity share is considered as the most common kinds of shares. By possessing these shares, the shareholder is entitled to the ownership rights of the company. The holders are called equity shareholders of the company, they bear the additional risk. Holders of these shares have voting rights on various issues, privileges to attend the annual or general board meeting, and stake in the company’s additional profits or losses.
However, the shareholders are entitled to receive dividends out of profits only after paying all other essential parties of the company. Further, equity shares are classified into two aspects i.e based on share capital and characteristics.
Types of equity shares classified based on share capital
- Authorised share capital- It implies the overall amount of capital that a limited company can raise by issuing shares. It is well mentioned in the Memorandum of Association (MoA) of the company.
- Issued Share Capital- Amount of capital that the company raises through issuing of stocks.The number of shares that are being sold or held by investors. The investors can be individual retail investors or large instructions.
- Subscribed Capital- It simply refers to the amount or percentage of the issued capital that has been subscribed by the investors. Sometimes, it is also possible that the investors fail to purchase all the shares issued by the company in the market.
- Paid-up Capital- It denotes the amount that investors have paid up by the shareholders. Hence, it is the amount of capital raised by issuing the shares.
Types of Shares based on characteristics
- Right Shares- It is a kind of shares that commonly issues to the existing investors. Such shares are issued specifically to protect the ownership rights of the existing shareholders.
- Bonus Shares- It implies the additional shares that are being issued to existing shareholders without any compensation. The shares are free of cost, generally given in the form of the dividend.
- Sweat Equity Shares- When the contribution of employees or the director is exceptionally well, the company issues shares in the form of reward.
- Voting and Non-Voting Shares- In general most of the shareholders have voting rights and can cast votes whenever required. Although, the companies are entitled to make an exception and can issue non-voting shares or differential shares.
As the name suggests, Preference Shares have special entitlements or preferential rights, primarily in regards to the dividends. They are on the highest priority list during the distribution of profits compared to other shareholders. In addition, at the time of winding up of the organisation, preferential shareholders are entitled to get capital reimbursement before any other shareholders.
However, in general, the preference shareholder doesn’t possess voting rights and enjoys fixed dividend rights irrespective of profit or loss. The types of shares classified under preference shares.
Redeemable and Irredeemable Preference Shares
Redeemable preference shares can be repurchased or claimed by the issuing company. The company can buy back or redeem these shares on meeting some specific conditions. There is no predetermined set of rules or time. On the contrary, irredeemable preference shares have no such entitlements.
Convertible and Non-Convertible Preference Shares
In a convertible preference share case, the shareholders possess special rights to convert shares into equity shares. In doing so, certain terms and conditions have to be met. Whereas, the non-convertible shares do not have such rights.
Participating and Non-Participating Preference Shares
Participating shareholders possess special rights to receive the additional profits, post-payment of dividends. On the other hand, non-participating shareholders are not entitled to receive such special benefits, they receive only a fixed amount of dividends.
Cumulative and Non-Cumulative Preference Share
In case, if a company fails to provide dividends for shareholders in a specific year, the dividends are carried forward to the following year. The cumulative shareholders get paid off in the future if profits incurred that year. On the contrary, non-cumulative share doesn’t get carried forward, which means no accumulated profits or dividends in the future.
It is worthwhile to spend specific time getting acquainted with meaning and different types of shares to understand the workings of the stock market. Knowing about shares will help immensely in making good investment decisions.