Types of Shares in brief

WHAT ARE SHARES ?

A company’s capital is divided into small equal units of a finite number. Each unit is known as a share . Thus, shares can be described as the financial instrument issued by the company to raise funds from the general public.  These shares enable the shareholders to an equal right to the business’s profits and an equal responsibility for the business’s arrears and deficits.

TYPES OF SHARES –

The shares of a company can be divided into following categories :-

  • ORDINARY SHARES – Ordinary shares are the most common type. They carry one vote per share and they entitle the owner to participate equally in the company’s dividends. The shareholders are entitled to voting rights, however, they are the last to be paid if the company is wound up.
  • NON VOTING ORDINARY SHARES – Non voting ordinary shares are almost same as ordinary shares except that these shares do not carry any voting rights or the right to attend general meetings . These shares are usually given to employees so that remuneration can be paid as dividends for the purposes of tax efficiency for both parties.
  • PREFERENCE SHARES – Preference shares are those shares which carry certain preferential rights as compared to other types of shares. The shares get preference over the equity shares as to the distribution of dividend and surplus at the time of winding up of the company. However, Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits and do not have any voting rights. 
  • CUMULATIVE PREFERENCE SHARES – These preference shares are those on which a number of unpaid dividends are accumulated and is carried forward as a liability, Therefore, the unpaid dividends of the past years are paid when adequate profits are earned by the company.
  • REDEEMABLE SHARES – Redeemable shares are issued on the terms that the company will/may buy them back at a future date. This is usually done with non-voting shares given to employees so that if the employee leaves, the shares can be taken back at their nominal value.

 

Although most companies use ordinary shares, however, it is possible for a company to issue more than one kind of share class as a way to vary shareholder voting, dividend and capital rights.

 A shareholder can hold different classes of shares in a single company and thereby enjoy the benefits from the differing rights (e.g. voting or dividend entitlement) that each class offers.

Accounting & Finance for Banking

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