Shares represent ownership in a company and are an essential aspect of the corporate world. When you own shares in a company, you become a shareholder, entitled to a portion of the company's profits and assets. Shares are a primary means through which individuals invest in companies, participate in decision-making processes, and enjoy potential financial returns.
What are the different types of shares?
Let us explore different types of shares:
1. Ordinary equity shares
Ordinary equity shares, also known as common shares, are the most prevalent type of shares. Holders of these shares have voting rights in the company's decision-making processes, allowing them to participate in the election of the board of directors and other significant matters.
2. Preference shares
Preference shares, as the name suggests, come with certain preferential rights over ordinary shares. These rights often include a fixed dividend payment before any distribution to ordinary shareholders and priority in case of liquidation.
Types of ordinary equity shares
Let us explore different types of ordinary equity shares:
1. Authorised share capital
The authorised share capitais the maximum value of shares that a company is allowed to issue, as specified in its memorandum of association. This ceiling can be increased through a formal process if the need arises.
2. Issued share capital
Issued share capital is the portion of authorised capital that the company has actually issued and sold to investors. It represents the total value of shares held by shareholders.
3. Subscribed capital and paid-up capital
Subscribed capital refers to the portion of issued shares that investors commit to purchasing. Paid-up capital, on the other hand, is the portion of subscribed capital that shareholders have paid for. Not all subscribed shares may be paid for immediately, allowing flexibility in financing.
4. Voting shares and non-voting shares
Voting shares grant shareholders the right to participate in the company's decision-making processes. Non-voting shares, while still providing ownership, do not grant such rights. This distinction is crucial for investors seeking an active role in corporate governance.
5. Sweat equity shares
Sweat equity shares are issued to employees or directors as part of their compensation package. These shares are not purchased but are instead granted as a reward for the individual's contribution to the company's growth.
6. Right shares
Right shares are offered to existing shareholders first, giving them the opportunity to purchase additional shares before they are made available to the public. This ensures that existing shareholders maintain their proportional ownership in the company.
7. Bonus shares
Bonus shares are additional shares distributed to existing shareholders without any cost. These shares are issued from the company's retained earnings or other reserves, and they increase the total number of outstanding shares without affecting the overall value of the company.
Types of preference shares
Let us explore different types of preference shares:
1. Redeemable and irredeemable preference shares
Redeemable preference shares come with a predetermined maturity date, allowing the company to buy back the shares from shareholders. Irredeemable preference shares, on the other hand, have no fixed maturity date and are a permanent part of the company's capital structure.
2. Convertible and non-convertible preference shares
Convertible preference shares give shareholders the option to convert their preference shares into ordinary equity shares after a specified period. Non-convertible preference shares do not have this conversion option, offering a fixed return without the possibility of equity conversion.
3. Participating and non-participating preference shares
Participating preference shares give shareholders the right to participate in the company's profits beyond the fixed dividend. Non-participating preference shares only entitle shareholders to the fixed dividend and nothing more.
4. Cumulative and non-cumulative preference shares
Cumulative preference shares ensure that if the company cannot pay the fixed dividend in a particular year due to financial difficulties, the unpaid dividends accumulate and must be paid in the future. Non-cumulative preference shares do not accumulate unpaid dividends.
Additional read: Day trading for beginners
What are the benefits of investing in shares?
Investing in shares offers several benefits, including the potential for capital appreciation, where the value of your investments can grow over time. Shares also provide opportunities to earn dividends, offering a regular income stream. Additionally, investing in shares allows you to own a portion of a company, giving you a say in corporate decisions through voting rights. Shares also provide liquidity, enabling investors to buy and sell easily in the stock market. Over the long term, shares can outperform other asset classes, making them a key component of wealth-building strategies.
Who should invest in shares?
Shares are suitable for individuals with a moderate to high risk tolerance, as they can be volatile in the short term. Those with a long-term investment horizon are ideal candidates, as shares tend to perform better over extended periods. Individuals seeking capital growth, rather than immediate income, may find shares a good fit. Additionally, investors who are comfortable researching and monitoring their investments, or those willing to work with a financial advisor, can benefit from investing in shares. Overall, shares are suited to those who wish to diversify their portfolio and are prepared for market fluctuations.
Conclusion
Understanding the different types of shares is crucial for investors to make informed decisions in the dynamic markets. Whether you seek voting rights, fixed income, or potential capital appreciation, choosing the right type of shares aligns with your investment goals. It is essential to consider the company's financial health, your risk tolerance, and the economic environment when selecting shares for your portfolio.
