What are Shares? Definition and Types

Investing is a popular choice of career these days as more and more people are getting aware of the benefits of shares and equities. 

 

All we have to do is either take professional advice from financial advisors or do detailed research ourselves, before taking any risk with our hard-earned money. This article will teach us about different types of shares that are available in the market. 

 

Shares- An Overview

 

The capital of a firm is broken down into small, equal pieces (equities) of a finite number. A share is a name given to each unit. That means a share is a fraction of a company's or financial asset's ownership. 

 

Shareholders are individuals who possess shares in a corporation. Shares exist as a financial asset for certain firms, allowing for an equitable distribution of any leftover earnings, if any, in the form of dividends.

 

Unlike debt capital, which is obtained through any type of loan or bond issuance, equity capital has no legal obligation to be repaid to investors, and shares, while they may pay dividends as a profit distribution, do not pay interest. 

 

Almost every company, from tiny partnerships or limited liability organizations (LLCs) to global enterprises, issues shares of some type. 

 

Watch this video on shares;

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Authorized shares and Issued shares:

 

The number of authorized shares is the maximum number of shares that a company's board of directors can issue. The number of shares issued to shareholders and tallied for ownership reasons is referred to as issued shares. 

 

Because the number of authorized shares affects shareholders' ownership, they have the option to limit it as they see fit. Shareholders convene a meeting to examine the matter and reach an agreement when they desire to raise the number of authorized shares. When shareholders agree to raise the number of authorized shares, the state receives a written request in the form of articles of amendment.

 

There are two types of shares available in the market: Preference share and Equity share. Let us learn about them further, in this article. 

 

(Related reading: Differences between Shares and Stocks)

 

Types of Shares:

 

1. Preference shares:

 

Preference shares are the type of shares issued by any company. When compared to regular shareholders, preferential shareholders have first dibs on a company's profits.

 

 Furthermore, in the case of a company's collapse, preferential shareholders receive payment before regular shareholders. 

 

As written by IIFL securities, there are four types of preference shares. 

 

 

• Cumulative and Non-Cumulative preference shares:

 

If a corporation does not declare an annual dividend on cumulative preference shares, the benefit is carried over to the next financial year. 

 

Outstanding dividend advantages are not available with non-cumulative preference shares.

 

 

• Participating and Non-participating preference shares:

 

Participating preference shares allow owners to earn excess profits after the firm has paid out dividends. This is in addition to receiving dividends. 

 

Apart from receiving dividends regularly, non-participating preference shares have no such advantages.

 

 

• Convertible and Non-convertible preference shares:

 

Convertible preference shares can be changed into equity shares after satisfying the company's Article of Association (AoA) requirements, but non-convertible preference shares do not.

 

 

• Redeemable and Irredeemable preference shares:

 

At a set price and time, a firm can repurchase or claim redeemable preference shares. These shares do not have a set maturity date. 

 

Irredeemable preference shares, on the other hand, are exempt from these restrictions.

 

 

2. Equity Shares:

 

These are also known as original shares, and they make up the majority of the shares issued by a firm. Equity shares are transferable and frequently exchanged on stock exchanges by investors. Investors have the right to receive dividends as equity shareholders, in addition to voting rights on corporate matters. 

 

The majority of businesses issue ordinary shares. These provide shareholders a residual claim on the firm and its revenues, allowing them to expand their investments through capital gains and dividends. 

 

Shareholders with common shares have voting rights, giving them more power over the company. These rights allow shareholders of record in a corporation to vote on specific corporate activities, elect board members, and authorize the issuance of additional securities or dividend payments. 

Furthermore, certain common stock has preemptive rights, which allow shareholders to acquire additional shares and keep their ownership percentage when the company issues new stock.

 

Dividends, on the other hand, are not fixed and are paid out of the company's profits. One should also keep in mind that, due to market volatility and other variables impacting stock markets, equity stockholders are exposed to the most risk as a percentage of their investment.

 

Equity shares can be distinguished based on definition, share capital, and returns. The amount raised by a corporation by issuing shares is known as equity financing or share capital. 

 

Additional Initial Public Offerings (IPOs) can be used to boost a company's share capital, (you can learn US-based IOPs of all time). Let us learn about them one by one.

 

1. Based on Definition:

 

Equity shares based on definition are as follows:

 

• Bonus shares: 

 

The term "bonus share" refers to additional equities that are given to current shareholders for free or as a bonus.

 

• Rights shares:

 

The essence of right shares is that a firm can issue additional shares to its current owners - at a defined price and within a specific time frame - before being listed on the stock exchanges.

 

• Sweat Equity shares:

 

If we have made a substantial contribution as a firm employee, the corporation may reward us by issuing sweat equity shares.

 

• Voting and Non-voting shares:

 

Even though the majority of shares have voting rights, the corporation can create an exception and provide owners with differential or zero voting rights.

 

2. Based on Share Capital:

 

Equity shares based on share capital are as follows:

 

• Authorized share capital:

 

Every firm must specify the maximum amount of capital that may be generated by issuing equity shares in its Memorandum of Associations.

 

That is the Authorised share capital. However, by paying additional costs and completing specific legal processes, the limit can be raised.

 

• Issued share capital:

 

Issued share capital refers to a portion of the company's capital that has been made available to investors through the issuing of equity shares.

 

• Subscribed share capital:

 

Subscribed share capital refers to the portion of the issued capital that has been purchased by investors.

 

• Paid-Up Share Capital:

 

Paid-up capital refers to the amount of money paid by investors to hold the company's equity. Subscribed and paid-up capital refer to the same amount since investors pay the complete amount at once.

 

3. Based on Returns:

 

Equity shares based on returns are as follows:

 

• Dividend shares:

 

A firm might opt to pay dividends on a pro-rata basis by issuing new shares. These are known as dividend shares.

 

• Growth shares:

 

Growth shares are connected with firms that have seen rapid development. While such firms may not pay dividends, the value of their shares rises swiftly, rewarding investors with financial gains.

 

• Value shares:

 

Value shares are traded on stock exchanges at a discount on their real value. Investors should expect prices to rise over time, resulting in a higher share price.

 

(Recommended read: Preference Shares vs Equity Shares)

 

Bottom Line

 

Another less popular type of share is the Differential Voting Right (DVR) shares. When compared to stock owners, DVR shareholders have fewer voting rights. Companies pay additional dividends to DVR shareholders to decrease voting rights. 

 

DVR shares are less expensive because they have fewer voting rights. The price difference between stock and DVR shares is around 30-40%.

 

In this article, we have discussed shares in detail and learned about all types of stocks available in the market. It will not only make research easier for people who were already into stocks and wanted to know about more options available, but for people who are just beginning with stock marketing and trading shares.