What are Shares and Types of Shares?
In the past few months, the share market has made headlines every morning. Investing in shares has emerged as the most popular way of generating long term wealth and fulfilling your financial goals. In fact, FY21 witnessed a whopping increase of 142 lac retail investors in India itself. Today, stocks or equities account for 12.9% of the total investments in India. As an investor, one needs to understand the basics of what the share market comprises and how it works.
What Is the Meaning Of Share?
A share represents a unit of equity ownership in a company. Shareholders are entitled to any profits that the company may earn in the form of dividends. They are also the bearers of any losses that the company may face. In simple words, if you are a shareholder of a company, you hold a percentage of ownership of the issuing company in proportion to the shares you have bought.
Shares can be further categorized into two types. These are:
They vary based on their profitability, voting rights and treatment in the event of liquidation.
Equity Shares Meaning
These are also known as ordinary shares and comprise the bulk of the shares being issued by a particular company. Equity shares are transferable and are traded actively by investors in stock markets. As an equity shareholder, you are not only entitled to voting rights on company issues but also have the right to receive dividends.
These dividends, however, are not fixed. Equity shareholders also partake in any losses faced by the company, limited to the amount they had invested. Equity shares can be further divided based on:
- Share capital
Classification Of Equity Shares based on Share Capital
Here is a look at the classification of equity shares based on share capital:
- Authorised Share Capital: Every company, in its Memorandum of Associations, requires to prescribe the maximum amount of capital that can be raised by issuing equity shares. The limit, however, can be increased by paying additional fees and after the completion of certain legal procedures.
- Issued Share Capital: This implies the specified portion of the company’s capital, which has been offered to investors through the issuance of equity shares. For example, if the nominal value of one stock is Rs 200 and the company issues 20,000 equity shares, the issued share capital will be Rs 40 lakh.
- Subscribed Share Capital: The portion of the issued capital, which has been subscribed by investors is known as subscribed share capital.
- Paid-Up Capital: The amount of money paid by investors for holding the company’s stocks is known as paid-up capital. As investors pay the entire amount at once, subscribed and paid-up capital refer to the same amount.
Classification Of Equity Shares based on Definition
Here is a look at the equity share classification based on the definition:
- Bonus Shares: Bonus share definition implies those additional stocks which are issued to existing shareholders free-of-cost, or as a bonus.
- Rights Shares: Right shares meaning is that a company can provide new shares to its existing shareholders - at a particular price and within a specific period - before being offered for trading in stock markets.
- Sweat Equity Shares: If as an employee of the company, you have made a significant contribution, the company can reward you by issuing sweat equity shares.
- Voting And Non-Voting Shares: Although the majority of shares carry voting rights, the company can make an exception and issue differential or zero voting rights to shareholders.
Classification Of Equity Shares based on Returns
Based on returns, here is a look at the types of shares:
- Dividend Shares: A company can choose to pay dividends in the form of issuing new shares, on a pro-rata basis.
- Growth Shares: These types of shares are associated with companies that have extraordinary growth rates. While such companies might not provide dividends, the value of their stocks increases rapidly, thereby providing capital gains to investors.
- Value Shares: These types of shares are traded in stock markets at prices lower than their intrinsic value. Investors can expect the prices to appreciate over some time, thus providing them with a better share price.
Preferential shareholders receive preference in receiving profits of a company as compared to ordinary shareholders. Also, in the event of liquidation of a particular company, the preferential shareholders are paid off before ordinary shareholders. Here are the different types of shares in this category:
- Cumulative And Non-Cumulative Preference Shares: In the case of cumulative preference shares, if a particular company doesn’t declare an annual dividend, the benefit is carried forward to the next financial year. Non-cumulative preference shares don't provide for receiving outstanding dividends benefits.
- Participating/Non-Participating Preference Share: Participating preference shares allow shareholders to receive surplus profits, after payment of dividends by the company. This is over and above the receipt of dividends. Non-participating preference shares carry no such benefits, apart from the regular receipt of dividends.
- Convertible/Non-Convertible Preference Shares: Convertible preference shares can be converted into equity shares, after meeting the requisite stipulations by the company’s Article of Association (AoA), while non-convertible preference shares carry no such benefits.
- Redeemable/Irredeemable Preference Share: A company can repurchase or claim redeemable preference share at a fixed price and time. These types of shares are sans any maturity date. Irredeemable preference shares, on the other hand, have no such conditions.
Investing in shares can prove to be a great source of long-term wealth generation for any individual investor. Stocks provide you with a variety of sectors and industries to choose from, helping you diversify your portfolio and mitigate your risks. Always remember to narrow down on trusted and reliable financial partners to open your Demat account and trading account, like IIFL.