Types of Shares

According to the Companies Act 2013, shares show how much of a company someone owns. If you have shares, you own a part of the company.

Public companies sell shares when they want to get money for their business. Besides owning a part of the company, shares can give you other benefits too. Some shares let you vote on company decisions, get dividends first, and share in profits or losses.

All types of shares usually come with the right to get dividends. Dividends are payments companies make to shareholders from their profits.

Types of Shares in India

According to the Companies Act 2013, Section 43 types of shares can be broadly classified into two types:

• Equity or Ordinary Shares

• Preference Shares

Equity Shares

Ordinary or Equity shares are the most common types of shares sold by public firms in order to raise funds. Shareholders who hold various categories of equity shares usually have voting rights, are eligible for general and annual meetings and may be entitled to a portion of the company’s earnings through dividends.

However, this dividend is not fixed. Equity shareholders will also bear losses of the company in case it incurs any up to the amount invested originally.

Types of Equity Shares

Equity shares can be classified into two different types of shares based on the criteria of being definition-based and feature-based.

• Authorised Share Capital:
  The total capital a company can raise by issuing stocks as stated in its Memorandum of Association (MoA).


• Issued Share Capital:
  The capital raised by a company through the issuance of stocks.


• Subscribed Capital:
  The term implies the amount of capital issued that investors have bought.


• Paid-up Capital:
  It is the sum total of money paid by investors for owning shares in a company, which is paid once hence subscribed and paid-up amounts are the same.

• Voting Shares and Non-voting Shares:
  Voting shares allow holders to vote on company matters but non-voting shares may have certain differential voting rights or none at all.


• Sweat Equity Shares:
  These types of equity shares are given to employees and directors as compensation. Companies often use these to retain employees and give them an ownership stake.


• Right Shares:
  Before they can be released to new investors, right shares are first offered at a discounted price to existing shareholders.


• Bonus Shares:
  They are extra stocks given out to current shareholders in appreciation for free or sometimes as a bonus.

Preference Shares

Preference shares hold special privileges, particularly concerning dividend distribution and capital reimbursement during company liquidation.

In other words, Preference shareholders are given a higher priority for receiving a company’s profits. They rank above ordinary shareholders in the distribution company's profits.

These types of shares differ in terms of profit share, voting rights, and capital settlement during liquidation.

Types of Preference Shares

• Redeemable and Irredeemable Preference Shares:
  Redeemable shares are types of preference shares that can be bought back by the company at a later date, while irredeemable shares cannot be repurchased by the issuing company.


• Convertible and Non-convertible Preference Shares:
  Convertible shares can be exchanged for equity shares under specific conditions, whereas non-convertible shares cannot be converted by investors.


• Participating and Non-participating Preference Shares:
  Participating preference stocks give holders the entitlement to participate in the profits of the company after all returns on equity shares. Non-participating preference shares, on the other hand, give shareholders a fixed dividend amount.


• Cumulative and Non-cumulative Preference Shares:
  Cumulative shares defer dividends paid into the subsequent years while non-cumulative do not bring forward unpaid dividends.

Conclusion:

Investors and companies need to distinguish between various types of shares so that they can move through the market and investment strategies. The potential for investing in different stocks leads to building wealth for individual investors over time. Different types of shares, therefore, enable portfolio diversification as well as risk reduction by allowing investors to enter different sectors or industries in different capacities.

These types of shares in the market can be well understood once you start trading. So open Demat account today and start investing in your choice of shares.