What are Shares and Types of Shares

To take the right steps for becoming a seasoned investor, you must understand that you can invest in a variety of stock market instruments. These include shares, derivatives, mutual funds and bonds. Among these, there are around 18 million investors in the stock/equity market. Stocks or equities account for around 12.9% of the total investments in India.

Wondering what are shares, and how they are different from stocks? When a company wants to raise capital for either expanding its business or for operational requirements, it has two options: either borrowing money or issuing stocks that provide part-ownership of the company to investors. Shares are the smallest denomination of a company’s stocks, indicating a portion of ownership of the company.

What Is the Meaning Of Share?

In simple words, a share indicates a unit of ownership of the particular company. If you are a shareholder of a company, it implies that you as an investor, hold a percentage of ownership of the issuing company. As a shareholder you stand to benefit in the event of the company’s profits, and also bear the disadvantages of the company’s losses.

Types Of Shares

Now that you know share definition, you must understand that broadly share can be of two types:

  • Equity shares
  • Preference shares

Equity Shares Meaning

These are also known as ordinary shares, and it comprises the bulk of the shares being issued by a particular company. Equity shares are transferable and 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. However, the dividends - issued from the profits of the company - are not fixed. You must also note that equity shareholders are subject to the maximum risk - owing to market volatility and other factors affecting stock markets - as per their amount of investment. The types of shares in this category can be classified on the basis of:

  • Share capital
  • Definition
  • Returns

Classification Of Equity Shares On The Basis Of Share Capital

Equity financing or share capital is the amount raised by a particular company by issuing shares. A company can increase its share capital by additional Initial Public Offerings (IPOs). Here is a look at the classification of equity shares on the basis of 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 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 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 On The Basis Of Definition

Here is a look at the equity share classification on the basis of 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 time-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 On The Basis Of Returns

On the basis of 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 increase 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 a period of time, thus providing them with a better share price.

Preference Shares Meaning

These are among the next types of shares issued by a company. 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 is a look at the different types of shares in this category:

  • Cumulative And Non-Cumulative Preference Shares Meaning: 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 Definition: 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 Meaning: 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 Definition: 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.

Conclusion

Thus, there are two types of shares: equity shares and preferential shares. Both have their own distinct sub-categories. After knowing what are shares and its types, you are all settled for starting your investment journey in stock markets. Always remember to zero in on a trusted and reliable financial partner to open your Demat account and trading account. Rely on a broking company which can provide you with cutting-edge trading platforms along with real-time market updates.

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