What Are Shares? What Are the Different Types of Shares?
Shares are financial instruments that allow companies to raise capital and investors to own a part of a company. It offers an easy way for companies to get funds for their daily operations and growth.
There are several factors that influence the value of a company’s shares. If a company is doing well and growing, its stocks or shares will reflect its increase in value. In such cases, if you want, you can sell some of its shares to earn profit.
Going further in this blog, you will learn more about the types and benefits of investing in one.
What Are Shares?
A share represents a unit of equity ownership of the issuing company. A purchaser of these shares is known as a shareholder of that company. This is because they hold a percentage of ownership of the issuing company in proportion to the shares they have purchased.
For example, a company’s market capitalisation is ₹1 crore. It decides to divide its ownership by issuing shares to the public worth ₹10 each. The total number of shares it issues will be 10 lakhs.
As a result, shareholders are entitled to various rights and obligations in proportion to their holdings. These can include partial rights over profits, voting rights and rights to exercise control over a company’s functioning.
What Are the Types of Shares?
Now that you understand how share works let’s look at two main types of shares. Shares can primarily be classified into – equity or common shares and preference shares.
- Equity Shares
Equity shares are also referred to as ordinary or common shares. These form the majority of shares issued by most companies. Equity shares are transferable, and shareholders may have voting rights, depending on the type of common share.
You can openly trade equities in the stock market, and as a shareholder, you face the highest market risk. Shareholders will receive no particular dividend ; it depends on the company’s profit.
- Preference Shares
Similar to equity shares, preference shares also give ownership rights to a company’s shareholders. But, as its name suggests, they give preferential rights over other shareholders. For instance, when a preferential shareholder is guaranteed a fixed dividend, they receive it on priority over the other shareholders.
When a company liquidates itself, preferential shareholders receive their due before the other equity shareholders. However, these shareholders can not benefit from any surplus profit the company makes and they do not have any voting rights.
What Are the Classifications of Equity Shares?
Equity shares can further be classified into these subcategories:
Based on Share Capital:
- Authorised Share Capital
Any organisation is required to state in the Memorandum of Association (MoA) the maximum fund amount it can raise by issuing equity shares. This amount can, however, further increase after paying additional charges and completing legal proceedings.
- Subscribed Share Capital
Subscribed share capital is the portion of issued capital subscribed by the investors. For example, if a company issues 1500 shares of ₹100 for each and the public applies for 1000 shares, then the issued capital is ₹1,50,000 and subscribed capital is ₹1,00,000.
- Issued Share Capital
This is the portion of the authorised capital amount offered to the investors through the issuance of equity shares. Suppose the value of a share issued by a company is ₹ 100 and the total number of equity shares issued is 50,000, the issued share capital of that company would be ₹5 lakh.
- Paid-Up Capital
The investors pay this amount for a portion of the subscribed capital. This is the capital that an organisation invests in its own operations.
Based on Definition:
- Voting And Non-Voting Shares
Equity shares with no voting rights are called non-voting shares, and shares with voting rights are voting shares.
Even if the majority of the equity shareholders get voting rights, the issuing company can make an exemption and create shares with zero or differential rights to the shareholders.
- Bonus Shares
Bonus shares are extra shares issued to shareholders at no additional cost. A company issues these shares as a monetary reward to shareholders or to convert its excess earnings into equity shares.
- Rights Shares
Rights shares allow existing shareholders to purchase new stocks at a discounted cost. By exercising this right, shareholders can buy new shares at a specified price and time. Alternatively, they can choose to let their rights lapse.
Rights shares are made available for subscription to existing investors before they are offered for trading in the market for potential investors.
- Sweat Equity Shares
These shares are exclusively available to the employees of an organisation when the employer offers them as a reward. It allows them to own a share of their company and is a great tool to retain employees with a sense of acknowledgement.
Based on Returns:
- Growth Shares
These are shares of companies with high growth potential. These shares may or may not pay out dividends but can help create wealth through capital appreciation.
- Dividend Shares
Dividend shares are the company’s way of paying dividends in the form of shares. These shares are issued based on pro rata. It is ideal to explain the pro-rata meaning here rather than in the FAQs.
- Value Shares
Value shares are traded in the stock market at a lower price than their intrinsic value. Investors can expect the price to increase gradually, resulting in them getting substantial profits over time. It is a good option for investors who have a long-term investment horizon.
What Are the Classifications of Preference Share?
Here are the further classifications of preference shares:
- Cumulative and Non-Cumulative Preference Shares
If a company does not declare any dividend in a particular year, the profits are accrued forward to the next year in the case of cumulative preference shares. In contrast, non-cumulative preference shares do not offer such benefits to the shareholders. If a company does not make enough profit to pay dividends, it cannot carry forward profits to the succeeding year.
- Redeemable & Irredeemable Preference Share
A company can buy back its redeemable shares at a fixed price at a later date. In contrast, the issuing company cannot repurchase irredeemable shares anytime later. However, According to Section 55(2) of the Companies Act, a Company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue.
- Participating & Non-Participating Preference Share
Participating preference shareholders benefit from surplus profit after it pays off dividends to equity shareholders. This is an extra benefit to the dividend payment. In contrast, non-participating preference shareholders do not receive any such surplus gain.
- Convertible & Non-Convertible Preference Shares
Convertible preference shares can be changed to equity shares as per the stipulations mentioned in a company’s Articles of Association (AoA). In contrast, non-convertible shares cannot be converted to equities.
What Are the Benefits of Investing in Shares?
Here are some of the benefits of investing in shares or how you can profit from investing in stocks:
- Investing in stocks gives you the opportunity for long-term wealth creation through capital appreciation.
- You can earn regular profits from companies paying out dividends. But it depends on the company and its performance.
- The share market allows you to diversify your investments across various sectors and market capitalisation. This helps you invest as per your risk appetite and financial goals.
- In some cases, being a shareholder, you get the company’s voting rights. This enables you to partake in significant decision-making events of the business.
- Inflation eats away the value of money. But when you invest in stocks, your investment grows through capital appreciation, making your returns help beat inflation.
- The Securities and Exchange Board of India regulates and monitors the Indian stock market, whose primary goal is to protect the interest of investors.
Who Should Invest in Shares?
Among various investments available in the market, shares are a suitable option for investors in the following cases:
- You have a long-term investment horizon.
- You want to be a shareholder of a company to receive additional benefits such as dividends.
- Liquidity is one of the conditions you look for in investment options.
- You want to be able to diversify your portfolio to maximise profit.
- You want to earn a significantly higher return than other investment options, such as fixed deposits.
Investing in shares or stocks can be a great way to create wealth over a long period. Also, the variations in sectors and types of shares help to diversify your portfolio and mitigate risks.
Frequently Asked Questions
What is market risk?
An investor faces market risk due to a decline in the market value of a financial product. Market risks are based on factors that affect the whole market and are not limited to a particular product or commodity.
What does pro-rata allotment mean in shares?
Pro-rata means “in proportion” in Latin. Pro-rata allotment of shares refers to the distribution of shares in accordance with the percentage of shares requested. This technique comes in handy at the time of over-subscription of shares.
What is an IPO in the stock market?
IPO or Initial Public Offering is when private companies offer their shares to the public for the first time at the time of issuance of new stocks. This is an excellent way of raising funds in the primary market.
Can I buy and sell equity shares on the same day?
Yes, you can buy and sell equity shares on the same day. This is known as intraday trading.