What are Shares? Meaning, Example, Types and Benefits

• Shares are units of ownership in a company's share capital.
• Shareholders generally have voting rights and may get dividends in case of equity shares.
• The main classes of shares are equity, preference and Differential Voting Right (DVR) shares.
• Preference shares may have priority in the payment of dividends and the return of capital in a liquidation.
• Preferred stock can be cumulative, noncumulative, convertible, redeemable or participating.
• Rights shares are offered to existing shareholders, while bonus shares are issued from a company’s reserves.
• A share can have a face value, an issue price, and a market price, each with a purpose.
• Companies issue shares to raise capital and fund their business activities.
• To buy shares in India, investors typically need a Demat and trading account with a SEBI-registered intermediary.

A company’s capital is divided into small equal units of a finite number. Each unit is known as a share. In simple terms, a share is a percentage of ownership in a company or a financial asset. Investors who hold shares in any company are known as shareholders. As per Section 2(84) of the Companies Act, 2013, a “share” legally means a share in the share capital of a company and includes stock. For example, if the market capitalisation of a company is ₹ 10 lakh and a single share is priced at ₹ 10, the number of shares to be issued will be 1 lakh. Let’s learn more.

1. Preference shares

As the name suggests, this type of share gives certain preferential rights as compared to other types of shares. The main benefits that preference shareholders have are:

• They get first preference when it comes to the payout of dividends, i.e., a share of the profit earned by the company
• When the company winds up, preference shareholders have the first right in terms of getting repaid

Further, there are different sub-types of preference shares:

Cumulative

Say a company has a rough year and skips the dividend. For cumulative shareholders, that money isn't gone; it just gets logged as arrears. Before equity shareholders see a single rupee once profits pick back up, the company has to clear this backlog in full.

Non-cumulative:

This one's less forgiving. Miss a year, and that dividend is simply gone; no carrying it forward, no catching up later, even if next year turns out to be a particularly strong one for the company.

Convertible

Think of these as preference shares with a switch built in. After a set period (as set out in the company's Articles of Association), holders can convert them into equity shares. So you get stable, priority income early on, then the choice to move into equity and share in the company's upside later.

Redeemable:

These have a buy-back option attached. The company can repurchase them from investors after a certain date, at a price both sides agreed to in advance. It gives the business flexibility to reshape its capital structure later, though it still has to comply with the Companies Act, 2013.

Participating

Holders of these shares get their fixed dividend like everyone else, but if the company has a standout year, they also get a cut of the extra profit after equity shareholders are paid first. It's not a common structure, but it can be very rewarding when business is booming.

Also Read: Types of Shares: Common & Preferred Classes of Stock

2. Equity shares

Equity shares are also known as ordinary shares. The majority of shares issued by the company are equity shares. This type of share is traded actively in the secondary or stock market. These shareholders have voting rights in the company meetings. They are also entitled to get dividends declared by the board of directors. However, the dividend on these shares is not fixed, and it may vary year to year depending on the company’s profit. Equity shareholders receive dividends after preference shareholders.

3. Differential Voting Right (DVR) shares

The DVR shareholders have fewer voting rights compared to equity shareholders. To dilute the voting privileges, companies provide extra dividends to DVR shareholders. As DVR shares have fewer voting rights, their prices are also low. DVR shares remain rare in India; Tata Motors was the only large listed company with a separately traded DVR (‘A’ ordinary shares), but it cancelled this structure in September 2024, converting DVR holders’ shares into ordinary shares at a ratio of 7 ordinary shares for every 10 DVR shares. Historically, the price gap between Tata Motors’ ordinary and DVR shares ran as high as 30-45%.

Also Read: What is Equity Share?

A single share can have three different price tags depending on how you're looking at it:

• Face value: the number printed on the certificate itself, set out in the company's Memorandum of Association. In India, the face value is usually ₹10, ₹5, ₹2, or ₹1. It's mostly relevant for accounting: it rarely tells you what the share is actually worth.
• Issue price: what investors actually pay when the company sells the shares, whether through an IPO, a rights issue, or some other route. The price matches the face value or is set higher, with the gap booked as a "share premium".
• Market price: the price the share is trading at right now on an exchange like the NSE or BSE. This one never sits still: it shifts constantly with demand, supply, how the company's doing, and overall market mood.

Companies isuse shares for the following reasons:

• To raise funds from investors.
• They also allow stakeholders a stake in the company’s profits.

For investors, investing in shares gives better returns on investment than traditional investment options and can help you compound your wealth in the long-run.

There are also two other situations where companies issue shares to people who already hold stock:

Rights shares: When a company wants to raise more money, it often turns to its existing shareholders first, offering them new shares at a discount before the general public gets a look. This protects current shareholders from dilution and rewards their loyalty.

Bonus shares: These are essentially free shares, handed out from the company's reserves or built-up profits, in proportion to what each shareholder already owns. The key difference from a rights issue: no new money comes in. It's really just the company turning its reserves into more shares floating around.

Here’s a quick side-by-side comparison to help you understand how the two main share types differ:

Also Read: What are Preferred and Common Stocks?

To buy shares in India, you need two things: a Demat account, which holds your shares electronically instead of as paper certificates, and a trading account, which you use to place buy and sell orders on a stock exchange like the NSE or BSE. Both accounts are opened through a SEBI-registered broker, known as a depository participant, linked to one of India’s two depositories, NSDL or CDSL, which are regulated by SEBI and hold your securities safely in electronic form. For a full step-by-step walkthrough of opening an account and placing your first order, see our dedicated guide on how to buy shares in India.

Shares represent ownership in a company and can provide the investor with an opportunity to share in the growth and earnings of the company. Equity shares, preference shares, rights shares, bonus shares – each type has different characteristics, benefits and risks. It is important to understand how shares work, how they are priced and how to buy shares using a Demat and trading account to help investors make better investment decisions. However, shares are market-linked investments, so it is important to evaluate your financial objectives, risk appetite and investment horizon before investing.

Also Read: What is the Share Market in India?