Stocks are classified on different aspects including market capitalization, classes, fundamentals, dividend payments, risks and price trends among others. Section 43 of the Companies Act, 2013 specifies the types of or stocks based on ownership.

Read on to know about such stocks.

Equity or Common stock

Equity or common stocks are the most common type of shares issued by any company. These provide dividend provided the company decides to declare the same. Equity shareholders are also entitled to vote in annual general meetings of the company, regarding any strategic decision undertaken by the company. This is perhaps one of the biggest benefits of being an equity or common stockholder.

Note that there are no specific sub-categories of this type of stock. However, the company may issue equity stocks with differential voting rights. While some of them may have only one vote per share, others may have multiple votes per share and may be issued only to senior management or a select category of investors. There are some categories of common stocks that are exclusively issued only to the founding members of the company.

Preferred stock

This is another category of stocks based on ownership. Unlike common stockholders, if you own a preferred stock, you don’t get voting rights in the annual general meetings of a company. However, as an owner of a preferred stock, you have the right to receive dividend forever.

Also, in the event of a company going into liquidation, as a preferred stockholder, you get preference over common stockholder. In other words, claims of the preferred shareholders are settled before that of a common stockholder in case the company undergoes liquidation.

Some of the categories of preferred stocks are:

  • Redeemable and Irredeemable stocks
  • Redeemable preferred stocks are stocks for which, at the time of issuance, the company decides the date on which it will repurchase them from its holders. On the other hand, irredeemable preferred stocks are issued for the lifetime.

  • Cumulative and Non-Cumulative preferred stocks
  • Cumulative preferred stocks carry a provision where the unpaid dividend of any year accumulated has to be paid at the time of redemption or otherwise. On the contrary, in a non-cumulative preferred stock the unpaid dividend is not carried forward and lapses.

  • Convertible and non-convertible preferred stocks
  • Convertible preferred stocks are converted into equity or common stocks at a date fixed by the company at the time of issuance. The ratio of conversion is also determined in advance. Non-convertible preferred stocks do not have any such option.
Thus, based on ownership, companies can issue common or preferred stocks which entitle the holders with different rights and privileges.

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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.

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