What are Shares - Meaning and the Different Types of Shares

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Shares, often used interchangeably with stocks, represent a slice of ownership in a company. For investors, understanding shares is paramount to navigating the dynamic world of the stock market. In this exploration, we'll uncover the meaning of shares, discern the difference between shares and stocks, and dissect the various types of shares.

What Are Shares?

Shares, in the realm of finance, symbolise ownership in a company. When an individual owns shares, they essentially hold a portion of that company. This ownership extends certain privileges, including the right to vote on company matters and a share in the company's profits.

What Are Stocks vs. Shares

While the terms "shares" and "stocks" are often used synonymously, there is a subtle difference. "Shares" refer to the ownership certificates in a specific company, indicating how much one owns. Today, these are mostly digital in nature. On the other hand, "stocks" represent ownership in any company. So, all shares are stocks, but not all stocks are shares.

Types of Shares: A Comprehensive Breakdown

1. Common Shares:

Common shares, also known as Ordinary Equity Shares, are the most prevalent type. They grant shareholders voting rights and a share in the company's profits. However, in the event of liquidation, common shareholders have the last claim on the company's assets.

Within this category, there are subtypes providing insights into the company's financial structure and shareholder participation.

  • Authorised Share Capital: This signifies the maximum value of shares a company can issue, portraying its potential financial scope.
  • Issued Share Capital: Represents the portion of authorised shares actually allotted to shareholders, indicating the initial ownership distribution.
  • Subscribed Share Capital: Reflects shares for which investors have applied, showcasing market demand.
  • Paid-up Capital: The money shareholders paid to the company for their shares, reflecting the actual investment.

2. Preferred Shares:

Preferred shares come with a set dividend payment, providing shareholders with a steady income stream. Unlike common shareholders, those with preferred shares don't usually have voting rights but have a higher claim on company assets during liquidation.

3. Cumulative Preference Shares:

A variant of preference shares, these accumulate unpaid dividends, ensuring they are paid before dividends to other shareholders.

4. Non-Cumulative Preference Shares:

Unlike cumulative preference shares, these do not accumulate unpaid dividends, with no carry-forward of undistributed dividends.

5. Convertible Shares:

Convertible shares provide the flexibility for shareholders to convert them into common shares after a predetermined period. This option allows investors to capitalise on potential future growth.

6. Non-Convertible Shares:

Stable in their existing form, non-convertible shares do not transform into ordinary shares.

7. Redeemable Shares:

With an expiry date, these shares are redeemable after a specific period or under certain circumstances, offering a defined exit strategy.

8. Rights Shares:

Existing shareholders get the initial opportunity to buy additional shares before public offerings, maintaining proportionality to their existing shareholding.

9. Bonus Shares:

Given to existing shareholders at no cost, bonus shares may replace cash dividends. Despite a reduction in share value, the total investment remains unchanged.

10. Dividend Shares:

Ideal for those seeking regular income, these shares are distributed by companies with a consistent dividend-paying history, providing stability and steady income without selling shares.

11. Growth Shares:

Belonging to companies poised for rapid growth, growth shares reinvest profits for expansion. Suited for long-term investors with higher risk tolerance.

12. Value Shares:

Trading below intrinsic value, these shares are sought by investors looking for undervalued companies, requiring thorough research and a long-term perspective.

Calculating the Value of Shares

Understanding the value of shares involves delving into market dynamics. The basic formula for calculating the value of shares is:

Value of Shares = Number of Outstanding Shares / Market Capitalisation

​For example, if a company has a market capitalization of ₹100 million and 10 million outstanding shares, the value of each share would be ₹10.k

Ownership CalculationIn Summary

Let us assume you have purchased 1,000 shares of a company that has a total of 1 million outstanding shares. The formula to calculate your ownership percentage is:

Ownership Percentage = (Total Outstanding Shares / Number of Shares Owned) × 100

So, you would own 0.1% of the company.

In Summary

Shares, as financial instruments, play a pivotal role in the world of investments. Grasping the meaning of shares and comprehending the different types of shares available empowers investors to make informed decisions. Whether you opt for common shares with voting rights, preferred shares with fixed dividends, or explore convertible and participating shares, each type carries its unique set of advantages and considerations. As you embark on your investment journey, armed with the knowledge of shares, you're better equipped to navigate the complexities of the stock market.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only.

For Detailed Disclaimers, click Here: https://bit.ly/3Tcsfuc

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