3 Ruling TYPE OF SHARES You Need To Learn! (IN DETAIL)
TYPE OF SHARES
Type of Shares is various. Mainly. it includes Preference Shares and Equity Shares. There are also various Types of Equity Shares and Preference Shares.
Issuing Shares is one of the major Sources of Financing to a company. Why a company issue shares? The main reason behind issuing shares is the scarcity of finance in the company.
A company needs Finance for various deals and transactions like purchase of raw materials, payment to employees, maintenance expenses, and other miscellaneous expenses. So, to fulfill the requirement of funds for these routine expenses companies maintains working capital.
The company also need finance for the survival, growth, and expansion of its Business. So, due to the scarcity of finance, the company acquire funds from various sources.
The main source of fund for the corporations is to issue shares. It issues shares to investors and the return/profit of shares depended upon Type of Shares invested.
The return or profit to the investor is totally based upon the Shares Type shareholder invested in. Companies issue different types of shares. Each share has its own different features, advantages, and disadvantages.
For a startup company, it is advisable to issue equity shares because, in the initial stage of a business, the risk factor is higher and in equity shares the dividend is paid based on the company's profit.
While for a well established and profit making company, it is better to issue preference shares more because in the case of preference shares the amount of dividend to be paid to the investors is fixed and investors cannot get a dividend based on the company's profit.
There are various types of shares a company may issue but mainly, shares are classified into three:
So, here is the elaboration of different kinds of equity shares in brief:
Issuing Shares is one of the major Sources of Financing to a company. Why a company issue shares? The main reason behind issuing shares is the scarcity of finance in the company.
A company needs Finance for various deals and transactions like purchase of raw materials, payment to employees, maintenance expenses, and other miscellaneous expenses. So, to fulfill the requirement of funds for these routine expenses companies maintains working capital.
The company also need finance for the survival, growth, and expansion of its Business. So, due to the scarcity of finance, the company acquire funds from various sources.
The main source of fund for the corporations is to issue shares. It issues shares to investors and the return/profit of shares depended upon Type of Shares invested.
The return or profit to the investor is totally based upon the Shares Type shareholder invested in. Companies issue different types of shares. Each share has its own different features, advantages, and disadvantages.
For a startup company, it is advisable to issue equity shares because, in the initial stage of a business, the risk factor is higher and in equity shares the dividend is paid based on the company's profit.
While for a well established and profit making company, it is better to issue preference shares more because in the case of preference shares the amount of dividend to be paid to the investors is fixed and investors cannot get a dividend based on the company's profit.
There are various types of shares a company may issue but mainly, shares are classified into three:
- Ordinary or Equity Shares
- Preference Shares
- Deferred Shares
Above mentioned are the main three kinds of shares a company may issue. There are various subcategories of shares.
1. ORDINARY OR EQUITY SHARES
Equity or Ordinary shares are the most commonly issued share type. Equity shareholders are considered as real owners of the company. Equity shareholders carry voting rights and involvement in the management of a company.
The reason behind most companies prefer to issue equity shares is that there is no fixed dividend paid to the shareholders. The dividend is paid based on the profit of a company.
Equity shares are for those investors who can take a risk. With great risk, there is a great return in equity shares. Equity or Ordinary shares also further classified into various types.
Types of Equity Shares:
Equity shares are classified into different types. Here is the list of various types of ordinary or equity shares:
- Authorized share capital
- Issued share capital
- Subscribed share capital
- Paid-up capital
- Right shares
- Bonus share capital
- Sweat equity shares
- Non-voting equity shares
So, here is the elaboration of different kinds of equity shares in brief:
Authorized share is the maximum amount of shares a company can issue. The limit is extended by companies from time to time.
The issued share capital is the part of authorized share capital. It is the number of shares a company issued and offered to its investors.
The subscribed share capital is the part of issued share capital. It is the share capital which investors have subscribed and accepts.
Paid up share capital is the part of subscribed share capital, which is paid by the investor. Generally, the company accept all the money in one slot only and hence, issued capital, subscribed capital and paid-up capital becomes the same.
Right shares are the shares issued by a company to it's existing shareholders.
Bonus shares are the shares issued by a company to its shareholders in the form of a dividend.
Sweat equity shares are the shares issued by the company for its directors or for its employees. Sweat equity shares compensate the employees in the form of shares instead of cash.
Non-voting equity shares mean the equity shares which does not have any voting rights and can't interfere in the management of a company.
Right shares are the shares issued by a company to it's existing shareholders.
Bonus shares are the shares issued by a company to its shareholders in the form of a dividend.
Sweat equity shares are the shares issued by the company for its directors or for its employees. Sweat equity shares compensate the employees in the form of shares instead of cash.
Non-voting equity shares mean the equity shares which does not have any voting rights and can't interfere in the management of a company.
2. PREFERENCE SHARES
Preference shares are for risk-averse investors. Because the dividend paid to the preference shareholder is fixed hence it reduces the risk for an investor. Preference shareholders have preferential rights in the payments of a dividend.
Preference shareholders do not have any voting rights which helps the company to avoid interference in the management of a company and crucial decisions would be taken by the company itself.
There is no chance of earning an extra dividend in the case of preference shares. The amount of dividend is fixed and must be paid by the company before paying a dividend to the equity shareholders.
Preference shareholders do not have any voting rights which helps the company to avoid interference in the management of a company and crucial decisions would be taken by the company itself.
There is no chance of earning an extra dividend in the case of preference shares. The amount of dividend is fixed and must be paid by the company before paying a dividend to the equity shareholders.
Types of Preference Shares:
The Preference share capital is of various types. Here is the list of different kinds/types of preference shares:
- Cumulative preference shares
- Non-cumulative preference shares
- Participating preference shares
- Non-participating preference shares
- Convertible preference shares
- Non-convertible preference shares
- Redeemable preference shares
- Irredeemable preference shares
From the above list, we can see eight main types of preference shares. Each and every type of preference share varies in its features. Here, is the explanation of different listed shares in brief:
Preference shares are always cumulative unless expressly mentioned in the (AOA) Articles of Association. Cumulative Preference shareholders have the right to claim the fixed dividend for the present year.
Non-cumulative preference shareholders can be paid only out of the profits of that year.
Participating preference shareholders are entitled to participate in the surplus profits of the company.
Non-participating preference shareholders are entitled only to the fixed dividend and do not have any participation in surplus profits of a company.
Convertible preference shareholders have a right to convert their shares into equity shares within a certain period of time.
Non-convertible preference shareholders do not carry any right of conversion of their shares into equity shares.
Redeemable preference shares can be redeemed after a certain period of time or through some notice at any time at the will of a company from the profits or sale proceeds of new shares.
Irredeemable preference shares are the shares which cannot be redeemed for the lifetime.
Preference shares are always cumulative unless expressly mentioned in the (AOA) Articles of Association. Cumulative Preference shareholders have the right to claim the fixed dividend for the present year.
Non-cumulative preference shareholders can be paid only out of the profits of that year.
Participating preference shareholders are entitled to participate in the surplus profits of the company.
Non-participating preference shareholders are entitled only to the fixed dividend and do not have any participation in surplus profits of a company.
Convertible preference shareholders have a right to convert their shares into equity shares within a certain period of time.
Non-convertible preference shareholders do not carry any right of conversion of their shares into equity shares.
Redeemable preference shares can be redeemed after a certain period of time or through some notice at any time at the will of a company from the profits or sale proceeds of new shares.
Irredeemable preference shares are the shares which cannot be redeemed for the lifetime.
3. DEFERRED SHARES
Deferred shares are the shares that deferred shareholders do not have rights to the assets of a company undergoing liquidation until equities or common and preferred shareholders are paid.
Deferred shares could be the share which is issued to company founders and does not allow payment of dividend until dividends are being paid to all the other class of shareholders.
Deferred shareholders are entitled to get all the remaining profits after all the obligations are being fulfilled. Generally, deferred shares provide great dividend payouts as compared to other types of shares. Also, this is the type of share which generally no longer in use. But, whenever issued, generally issued to founders of the company.
Conclusion:
Thus, there are three ruling Type of Shares, Equity Shares, Preference Shares & Deferred Shares exists and in this post, we can see each of them and their sub-types.
Each of the above-mentioned Types of Shares varies according to its nature, use, benefits, and limitations. Here, we can conclude that companies issues various Type of Shares for the expansion and growth of their business organization.
Related Article:
3 Ruling TYPE OF SHARES You Need To Learn! (IN DETAIL)
Reviewed by BK
on
January 15, 2019
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Reviewed by BK
on
January 15, 2019
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