This article on ‘What do you understand by ‘shares’ in a company? How many types of shares can be issued by a listed or unlisted company?’ was written by an intern at Legal Upanishad.
A company’s whole capital is divided into shares. Each share, which represents one ownership position in a company, is auctioned off so that the company may generate money. There are two types of shares: equity shares and preference shares. If you possess equity shares, you may vote at the company’s annual general meetings (AGMs) and get a portion of its earnings and profits. This sort of shareholder is required to participate in both the earnings and losses of the firm in which they have invested.
This article covers the meaning of shares and types and classifications of shares into equity shares, preference shares, and DVRs available in the market.
Meaning of Shares in a Company
Shares are the units of ownership in a company that are worth money. In some businesses, shares are a type of financial asset that lets any leftover profits, if they are declared, be shared out fairly in the form of dividends. If a stock doesn’t pay dividends, shareholders don’t get a share of the company’s profits when the profits are shared out. They are looking forward to getting a piece of the stock price going up as the company makes more money.
So, “shares” and “stock” are sometimes used in place of each other. Most companies provide common stock. These give shareholders a continuing right to the company and its income, allowing their investments to grow through both capital gains and dividends. Common/ Equity shares with voting rights give shareholders a stronger say in how the company is run.
Common/Equity shares and preference shares, which are represented by the acronyms “common share” and “preferred share,” are the two main types of stock/shares that can be owned in a company.
With these rights, a company’s shareholders can vote on different business decisions, choose members of the board of directors, agree to the issuance of new securities, and agree to the payment of dividends. Also, some types of common stock give shareholders “pre-emptive rights,” which let them buy more shares if the company issues new stock while keeping the same percentage of ownership as before.
What exactly does it mean to hold Equity Shares?
These are also known as “ordinary shares,” because they constitute the vast majority of a company’s shares distributed. Investors constantly purchase and sell equity shares of publicly listed firms on the stock market. In addition to the ability to vote on major corporate decisions, equity owners are able to receive dividends.
However, these benefits are not always constant. If the company loses money, shareholders will lose money as well, but only up to the amount of their original investment. The following are some examples of criteria for dividing equity shares:
Distribution of Equity Shares based on Share Capital
The following is a breakdown of the various kinds of equity shares based on their share capital:
Approved share capital: The maximum amount of capital that may be raised via the sale of equity shares is referred to as the “approved share capital” and must be established in the company’s articles of incorporation. In contrast, the limit may be increased in return for the payment of additional charges and the future completion of certain legal procedures.
Issued share capital: It refers to the proportion of a company’s total capital that has been made accessible to investors in the form of equity shares. For example, if the nominal price per share is Rs. 200 and the company issues a total of 20,000 equity shares, the total amount of issued share capital would be Rs.
Subscribed Share Capital: Is the Portion of the Issued Capital That Investors Have Acquired. The subscribed share capital is the fraction of the issued capital that investors have acquired.
Paid-Up Capital: The phrase “paid-up capital” refers to the amount of money investors have paid for the right of holding a company’s stocks. Because investors pay the whole amount at once, subscribed capital and paid-up capital are identical.
Definition-Based Equity shares
Here is a look at how the definition sorts the different types of equity shares.
Bonus shares: Bonus Shares are free shares of stock that are given to shareholders who already own some. The people who get these extra shares think of them as a “bonus.”
Rights Shares: The idea behind rights shares is that a company can give its current shareholders more shares at a certain price and within a certain amount of time before those shares can be traded on stock markets.
Sweat Shares: If you work for a business and have made a big difference, the company may decide to give you sweat equity shares as payment.
There are two kinds of shares: ones that let you vote and ones that don’t. Even though most shares have voting rights, the business can make an exception and give shareholders voting rights that aren’t equal or don’t exist at all.
Distribution of Returns for Classification of Equity Shares
This section examines the different types of stocks in terms of their returns.
Dividend shares: A company has the option of distributing dividends in the form of pro-rata share issuance. These are known as dividend shares.
The phrase “growth shares” refers to the many types of shares issued by companies with outstanding yearly growth rates. Despite the fact that these companies do not pay dividends, the value of their stocks often increases rapidly, providing investors with the potential for financial gains.
Value Shares: Value shares are a kind of share that may be purchased and sold on stock exchanges at prices below the share’s intrinsic value. It is realistic for investors to assume that prices would grow over time, resulting in an increase in their share values.
Regular shareholders get a smaller portion of a company’s profits compared to the portion that is distributed to preferential shareholders. Preferred shareholders get their payouts before regular shareholders do in the event that a firm goes bankrupt. The following is a list of the many types of shares that are included in this category:
The advantage of cumulative preference shares: is carried over to the next fiscal year in the event that a company is unable to pay an annual dividend. On the other hand, the benefit of non-cumulative preference shares is not carried over. Non-cumulative preference shares do not provide holders with the opportunity to collect dividends that have been accumulated.
Shares of Participating and Non-Participating Preference: Shares of Participating Preference allow shareholders to recover surplus earnings after the company has paid dividends, but Non-Participating Preference Shares do not allow this. In addition to getting dividends, you will also get this. There are no benefits associated with holding non-participating preference shares other than the fact that shareholders are entitled to receive dividends on a consistent basis.
Convertible Preference Shares and Non-Convertible Preference Shares: Convertible preference shares have the ability to be converted into equity shares, provided that they meet the requirements of the company’s Article of Association (AoA), whereas non-convertible preference shares do not have this privilege.
Redeemable Preference Shares and Non-Redeemable preference shares: are those that may be repurchased or claimed at a set price and period. Irredeemable preference shares cannot be repurchased or claimed. These different kinds of shares do not have a set date when they will become fully paid. On the other hand, these requirements are not applicable to irredeemable preference shares
Differential Voting Rights (DVR)
The voting rights of stock owners are broader than those of DVR shareholders. When corporations want to make it more difficult for DVR shareholders to vote, they increase dividends for these stockholders. DVR shares are comparatively inexpensive since they do not bestow the same amount of voting rights as other shares. There is a thirty to forty percent pricing difference between stock shares and DVR shares.
Over a longer period of time, investing in shares of publicly traded companies may be a great way for any individual investor to build wealth. By investing in stocks, which give you access to a wide range of markets and businesses, you can spread out your holdings and reduce the amount of risk you face. Always keep in mind that to set up your trading account and Demat account, you should only work with reputable and trustworthy financial partners, like IIFL.
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