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Types of shares

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Shares represent a unit of ownership in a company, giving investors a stake in the company’s profits and assets. Companies issue shares to raise capital, and in return, shareholders gain voting rights, dividends, and a chance to benefit from the company’s growth. Shares are traded in the stock market, where their prices fluctuate based on various factors, including company performance, market trends, and investor sentiment.

There are different types of shares that company’s issue, each catering to specific investor needs. The two primary categories are equity shares and preference shares. Equity shares, also known as ordinary shares, provide shareholders with voting rights and the potential for capital appreciation. Preference shares, on the other hand, guarantee a fixed dividend and have priority over equity shares in dividend payments and during liquidation. Additionally, companies may issue bonus shares and sweat equity shares, which offer unique benefits to existing shareholders and employees, respectively.

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 the different types of shares?     

There are several types of shares that companies can issue, each offering different benefits to the shareholders. The two main types are equity shares and preference shares.

Equity shares, also known as ordinary shares, are the most common type of shares issued by a company. These shares give shareholders voting rights and a claim on the company's profits through dividends, though dividends are not guaranteed. On the other hand, preference shares provide shareholders with a fixed dividend and have priority over equity shares in receiving dividends and during the liquidation of a company's assets.

Additionally, companies may issue special shares like bonus shares, which are distributed free of cost to existing shareholders, and sweat equity shares, which are issued to employees or directors as a reward for their contribution to the company. 

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.

Ordinary Equity Shares

Aspect

Equity Shares

Preference Shares

Dividend Payment

Variable, not guaranteed

Fixed, paid before equity shareholders

Voting Rights

Yes

No

Priority in Liquidation

After preference shares

Before equity shares

Capital Growth

Higher potential for capital growth

Limited capital growth, but stable income

Equity shares are considered riskier than preference shares, but they offer higher growth potential in the long term. Investors in equity shares have the right to vote in company meetings, giving them a say in critical decisions like mergers and acquisitions. 

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 Preference Shares

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

Types of Ordinary Equity Shares

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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Frequently Asked Questions

What is the difference between preferred shares and cumulative preferred shares?

Answer Field

Preferred shares provide fixed dividends, while cumulative preferred shares allow unpaid dividends to accumulate until they are paid out.

How do convertible shares work and how do they differ from regular shares?

Answer Field

Convertible shares can be converted into a predetermined number of equity shares, offering flexibility to shareholders. Regular shares cannot be converted.

What is the impact of stock splits on share value and ownership?

Answer Field

Stock splits reduce the price of shares by increasing the number of shares, but the total ownership and value remain unchanged for shareholders.

What are the different types of shares available in the stock market?

Answer Field

The main types of shares are equity shares and preference shares, along with special categories like bonus shares and sweat equity shares. 

How do equity shares differ from preference shares?

Answer Field

Equity shares offer voting rights and potential for higher returns, while preference shares provide fixed dividends and priority in asset distribution.

What role does the Memorandum of Association play in defining share capital?

Answer Field

The Memorandum of Association outlines the company’s authorized share capital, including the maximum number of shares it can issue.

How is equity share capital calculated and what does it signify?

Answer Field

Equity share capital is the total value of equity shares issued by a company and represents the company's ownership structure.

What are bonus shares and how do they affect existing shareholders?

Answer Field

Bonus shares are additional shares given to existing shareholders free of cost, increasing their total shareholding without diluting ownership.

Can you explain the concept of sweat equity shares and their impact on a companys shareholding?

Answer Field

Sweat equity shares are issued to employees or directors as compensation for their contribution to the company. This helps retain talent and aligns their interests with the company’s growth.

How does share capital influence a companys financial health and operations?

Answer Field

A company’s share capital represents its financial foundation, influencing its ability to raise funds, attract investors, and expand operations.

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