A share is a unit of company ownership divided among a group. The shareholders receive every profit the company earns in dividend form and bear losses facing the company. Money spent by shareholders in buying shares determines their percentage of ownership of the company. There are two types of shares, including equity and preference shares.
These are also called ordinary shares. Equity shareholders have the privilege of voting about certain company matters and bear the highest risk. Equity shares can be transferred, and the dividends are a portion of the profits. The shareholders do not get fixed dividends, and their liability is not limited to the investments made.
Equity shares are unique in that they remain in the company and are given back after closing the company. Equity shareholders have a right to vote, and they choose company management. There are no fixed dividend rates in equity capital, and it depends on the obtainability of capital. The types of equity shares are differentiated by share capital. They include:
Authorized share capital: means the maximum amount of capital a corporation can issue as prescribed by its Memorandum of Associations. Depending on a specific issue, it could be increased over time, but the company needs to follow certain formalities and pay some fees for legal procedures.
Issued share capital is a portion of capital that a company offers to investors by issuing equity shares.
Subscribed share capital refers to a part of capital issued that investors agree to and accept. Shareholders usually have a subscription to the shares.
Paid-up capital refers to a portion of subscribed capital that investors pay for holding stocks. Issued shares, subscribed shares and paid capital are similar because most companies agree to the whole subscription amount at one time.
Other types of equity shares include;
Bonus shares refer to additional stocks issued to existing shareholders at no cost or as a bonus.
Right shares refer to shares issued to existing investors to protect their ownership rights.
Sweat equity shares are rewards given to employees or executives after they do their work exceptionally well.
Voting and non-voting shares: Most shares have voting rights, but the company can make a difference and issue shareholders zero voting rights.
Dividend shares: at times, a company can decide to issue dividends instead of shares on a calculated share basis.
Growth shares: these kinds of shares mostly deal with corporations with extremely high growth rates. These companies may not provide dividends, but the value of shares has an extraordinary increase that provides capital benefits to investors.
Value shares are primarily traded in stock exchange markets at a lower price than their actual value. Investors expect that prices rise over time hence better prices for their shares.
These shares are also called preferred stock and are paid to shareholders before ordinary dividends are issued. These preferential shareholders receive their profits before ordinary shareholders. They also receive preferential treatment when a company is liquidated due to reasons like bankruptcy.
Most preference shares are different from common stocks because they have fixed dividends, they also have no voting rights, shareholders don’t have participation right in management decisions, and the shareholders are given preference before equity shareholders.
Examples of preference shares include:
Cumulative & non-cumulative preference shares: cumulative shares refer to when a company doesn’t give dividends for a particular year to its shareholders and are carried forward in an accumulated amount. If the company makes any profit, these accumulated dividends get paid first. Non-cumulative shares do not have omitted dividends; hence, they have no right to claim accumulated dividends in the next financial year.
Participating & non-participating preference shares: the participating shares provide the shareholders a chance to get the surplus profits after all dividends have been paid. These shareholders can receive preferred and additional dividends depending on certain conditions. These additions are only paid if the dividends paid to common shareholders are higher than the predetermined shared amount. In a liquidation case, participating preferred shareholders have a right to be paid back per-share purchasing price together with the remains of the proceeds from common shareholders. Non-participating preference shares don’t get such benefits and rights apart from the ordinary dividends.
Convertible & non-convertible preference shares: convertible preference shares is an option given to shareholders that allows them to change their preferred shares to a certain number of common shares at any time after setting a date. Mostly these shares are converted after requests from shareholders. Convertible shares are only converted to equity shares after specific stipulations are met from the Article of Association. Non-convertible preference shares don’t have this advantage.
Redeemable & irredeemable preference shares: a corporation has a right to claim redeemable preference shares after a particular fixed time and price or after reaching maturity. Irredeemable preference shares do not face these conditions.