Understanding Different Types of Shares: Guide for Investors

What are shares?

Shares are fractional ownership interests in a corporation. For some businesses, shares are a type of financial instrument that allows for the equitable distribution of any declared residual profits in the form of dividends. A stock with no dividend payments does not distribute its income to its shareholders. Instead, they look forward to further stock price growth as business profits rise.

Shares are an organization’s equity capital, and there are two primary kinds of shares: common shares and preferred shares. As a result, the terms “shares” and “stock” are frequently used synonymously.

Types of shares?

The majority of the shares that specific firm issues are equity shares, sometimes referred to as ordinary shares. Equity shares can be transferred and are actively traded on stock exchanges by investors. As an equity shareholder, you have the right to dividend payments in addition to voting rights on corporate matters.

However, these pay-outs are not constant. Equity investors share in any losses incurred by the business up to the amount they invested.

Observe how equity shares are divided according to share capital:

Authorized Share Capital: Each company is required to specify the maximum amount of capital that can be raised through the issuance of equity shares in its Memorandum of Associations. However, the cap may be raised by completing specific legal processes and paying additional fees.
Issued Share Capital: The amount of the company’s capital that has been made available to investors through the issuance of equity shares is denoted by this term. The issued share capital, for instance, would be Rs 10 lakh if the company issued 10,000 equity shares at a nominal value of Rs 100 each. Known as subscribed share capital, subscription share capital is the portion of the issued capital that has been purchased by investors.
Paid-Up Capital: The sum of money that investors have contributed to hold the company’s shares is referred to as paid-up capital. Both subscribed capital and paid-up capital refer to the same amount because investors pay the complete amount at once.

Now consider the classification of equity shares based on the definition:

Bonus Shares: The term “bonus shares” refers to extra shares that are given as a gift or bonus to current shareholders.
Rights Shares: A firm can issue new shares to its current owners at a predetermined price and within a specific timeframe before making them available for trade on stock markets.
Sweat Equity Shares: If you have made a significant contribution to the company as an employee, the corporation may choose to reward you by issuing sweat equity shares.
Voting And Non-Voting Shares: Although the majority of shares have voting privileges, the business may grant shareholders with differential or no voting privileges.

Here are some share categories based on returns:

Dividend Shares: A business has the option to prorate dividend payments by issuing new shares in place of cash.
Growth Shares: These kinds of shares are linked to businesses that experience rapid growth. While such businesses might not pay dividends, the value of their stocks rises quickly, giving investors financial gains.
Value Shares: These kinds of shares are sold on the stock market at prices that are below their true worth. Investors can anticipate an increase in price over time, giving them a higher share price.

In comparison to regular shareholders, preferential shareholders are given preference in receiving a company’s profits. Additionally, preferred shareholders are compensated before common shareholders in the event of a company’s insolvency. The many share types that fall under this category are as follows:

Cumulative And Non-Cumulative Preference Shares: In the case of cumulative preference shares, the benefit is carried over to the following fiscal year if a certain company does not pay an annual dividend. Unpaid dividend advantages are not offered by non-cumulative preference shares.
Participating vs. Non-Participating Preference Shares: Participating preference shares permit shareholders to earn excess profits following the company’s payment of dividends. This is in addition to receiving dividends. Other than dividends that are received regularly, non-participating preference shares do not have any such advantages.
Convertible/Non-Convertible Preference Shares: While non-convertible preference shares have no such advantages, convertible preference shares can be converted into equity shares after fulfilling the necessary requirements by the company’s Article of Association (AoA).
Redeemable/Irredeemable Preference Share: At a set price and time, a firm may repurchase or claim redeemable preference shares. There is no maturity date for these shares. However, there are no such restrictions on irredeemable preference shares.

Shares meaning?

The capital of a firm is split up into tiny, equal units of a finite number. Shares are the name given to each unit. A share, to put it simply, is a portion of ownership in a business or a financial asset. Shareholders are investors who possess stock in a corporation.

For instance, if a firm has a market capitalization of Rs. 10 lakh and each share is valued at Rs. 10, then there will be 1 lakh shares issued.

Owners of a corporation have the option of issuing preferred shares or common stock to investors. In exchange for funds required to expand and run the business, companies issue equity shares to investors. The founders or partners of privately held businesses or partnerships own the stock. Shares of small businesses are sold to outside investors on the primary market as they expand. Friends and relatives may be among them, followed by angel or venture capital (VC) investors. If the business keeps expanding, it might try to obtain more equity money by selling shares to the general public through an IPO (IPO). A company’s shares are referred to as being publicly traded once they are listed on a stock exchange following an IPO.

Companies issue stock for a variety of reasons, all of which are important to the long-term objectives of the business.

These privileges give shareholders with a record the ability to decide whether or not to approve the issuance of additional securities or the payment of dividends, as well as vote on other corporate decisions. Additionally, some common stock has pre-emptive rights, allowing stockholders to purchase additional shares and maintain their ownership stake when the company issues additional stock.
The quantity of shares that a company’s board of directors may issue is known as authorized shares. The number of shares that are distributed to shareholders and included in ownership calculations is known as the number of issued shares.
Shareholders may set a cap on the authorized number of shares as they see fit because it affects their ownership. Shareholders hold a meeting to examine the matter and come to a decision when they want to increase the number of authorized shares. The state receives a formal request through the filing of articles of amendment when shareholders decide to increase the number of authorized shares.

Conclusion

After understanding share and its types, now let’s understand the general norm. The majority of businesses issue common shares. These give owners a continuing stake in the business and its earnings, offering the possibility of investment development through both capital gains and dividends. Additionally, common shares have voting privileges, providing stockholders greater control over the company. Companies that issue shares do so primarily to raise capital for operations and growth. The investor who buys these shares does, however, acquire a portion of the company. When investing in equity shares, the shareholder gets voting privileges within the company. The process of raising money via stock shares is known as “equity financing.”