What is shares? Types & explanation.

 

What is Shares? 

A company's capital is divided into small equal units of a finite number. Each unit is known as a share. In simple terms, a share is a percentage of ownership in a company or a financial asset.

     

What are the different types of shares?

Broadly, there are two – equity shares and preference shares.

Equity shares: Equity shares are also referred to as ordinary shares. They are one of the most common kinds of shares. These stocks are documents that give investors ownership rights of the company. Equity shareholders bear the highest risk. Owners of these shares have the right to vote on various company matters. Equity shares are also transferable, and the dividend paid is a proportion of profit. One thing to note, equity shareholders are not entitled to a fixed dividend. The liability of an equity shareholder is limited to the amount of their investment. However, there are no preferential rights in holding.

Equity shares are classified as per the type of share capital.

Authorized share capital: This is the maximum amount of capital a company can issue. It can be increased from time to time. For this, a company needs to conform to some formalities and also pay required fees to legal entities.

Issued share capital: This is the portion of authorized capital which a company offers to its investors.

Subscribed share capital: This refers to the portion of issued capital upon which investors accept and agree.

Paid-up capital: This refers to the portion of the subscribed capital for which the investors pay. Since most companies accept the entire subscription amount at one go, issued, subscribed, and paid capital are the same thing.

There are a few other types of shares.

Right share: These are the kind of shares a company issue to its existing investors. Such stocks are issued to protect the ownership rights of existing shareholders.

Bonus share: Sometimes, companies may issue shares to their shareholders as a dividend. Such stocks are called bonus shares.

Sweat equity share: When employees or directors perform their role exceptionally well, sweat equity shares are issued to reward them.

Preference shares: In our discussion on what are types of shares, we will now we will look at preference shares. When a company is liquidated, the shareholders who hold preference shares are paid off first. They also have the right to receive profits of the company before the ordinary shareholders.

Cumulative and non-cumulative preference shares: In the case of cumulative preference share, when the company does not declare dividends for a particular year, it is carried forward and accumulated. When the company makes profits in the future, these accumulated dividends are paid first. In case of non-cumulative preference shares, dividends do not get accumulated, which means when there are no future profits, no dividends are paid.

Participating and non-participating preference shares: Participating shareholders have the right to participate in remaining profits after the dividend has been paid out to equity shareholders. So, in years where the company has made more profits, these shareholders are entitled to get dividends over and above the fixed dividend. Holders of non-participating preference shares do not have a right to participate in the profits after the equity shareholders have been paid. So, in case a company makes any surplus profit, they will not get any additional dividends. They will only receive their fixed share of dividends every year.

Convertible and non- convertible preference shares: Here, the shareholders have an option or right to convert these shares into ordinary equity shares. For this, specific terms and conditions need to be met. Non-convertible preference shares do not have a right to be converted into equity shares.

Redeemable and Irredeemable preference shares: Redeemable preference shares can be claimed or repurchased by the issuing company. This can happen at a predetermined price and at a predetermined time. These do not have a maturity date which means these types of shares are perpetual. So, companies are not bound to pay any amount after a fixed period.

Merits of Equity Shares Capital:

1. ES (equity shares) does not create a sense of obligation and accountability to pay a rate of dividend that is fixed.
2. ES can be circulated even without establishing any extra charges over the assets of an enterprise.
3. It is a perpetual source of funding, and the enterprise has to pay back; exceptional case – under liquidation.
4. Equity shareholders are the authentic owners of the enterprise who possess the voting rights.

Demerits of Equity Shares Capital:

1. The enterprise cannot take either the credit or an advantage if trading on equity when only equity shares are issued.
2. There is a risk, or a liability overcapitalization as equity capital cannot be reclaimed.
3. The management can face hindrances by the equity shareholders by guidance and systematizing themselves.
4. When the firm earns more profits, then, higher dividends have to be paid which leads to raising in the value of the shares in the marketplace and its edges to speculation as well.