Shares and its Types

 Shares represent the smallest unit of ownership in a company. When individuals or entities purchase shares, they are essentially buying a portion of the company. This ownership entitles shareholders to a claim on the company’s assets and earnings. The concept of shares is fundamental in the corporate world, providing companies with a mechanism to raise capital for expansion and operations, while offering investors an opportunity to participate in the company's profits.

Types of Shares

Primarily, there are two types of shares that companies issue:

1. Equity Shares

• Definition: Equity shares, also known as ordinary shares, represent the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of these shares are members of the company and have voting rights.

• Characteristics:

  • Voting Rights: Equity shareholders have the right to vote on various matters of the company, including major decisions and electing directors.
  • Dividend: The dividend on these shares depends on the profitability of the company; hence, it is variable. There is no fixed rate of dividend.
  • Return on Investment: Equity shares can potentially offer high returns through capital appreciation. However, they come with higher risk compared to debt securities.
  • Risk: Equity shareholders are the last to be paid in the event of liquidation. Their investment is subject to business and market risks.

• Advantages for Investors:

  • Opportunity for capital growth
  • Voting rights in company decisions
  • Dividend income based on company performance

2. Preference Shares

• Definition: Preference shares are a type of share that typically provides no voting rights but offers a fixed dividend. In the event of liquidation, preference shareholders are paid before equity shareholders.

• Characteristics:

  • Dividend: Preference shareholders receive dividends at a fixed rate and are paid before equity shareholders.
  • Priority in Payment: In case of liquidation, preference shareholders have a priority over equity shareholders in asset distribution.
  • Convertible: Some preference shares come with an option to convert into equity shares after a certain period.
  • Redemption: These shares may be redeemable at the option of the company, meaning the company can buy back the shares at a predetermined price.

• Advantages for Investors:

  • Less risky compared to equity shares
  • Fixed income through dividends
  • Priority over equity shareholders in the event of liquidation

Other Types of Shares

While equity and preference shares are the primary categories, companies may issue various types of shares for strategic reasons, such as:

• Differential Voting Rights (DVR) Shares: These shares offer different voting rights compared to ordinary equity shares, usually less. They might offer higher dividends to compensate for the reduced voting power.

• Bonus Shares: Issued to existing shareholders from the company’s retained earnings, in proportion to the number of shares already owned.

• Rights Shares: Shares offered to existing shareholders at a discounted price, on a pro-rata basis, to raise additional capital.

Conclusion

Understanding the different types of shares is crucial for investors to make informed decisions based on their risk appetite, investment goals, and the need for income or growth. Companies, on the other hand, can tailor their capital structure through the issuance of different types of shares, balancing between the need to raise capital and maintaining control over the company.