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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 of any company are known as shareholders.For example ; if the market capitalization of a company is Rs. 10 lakh, and a single share is priced at Rs. 10 then the number of shares to be issued will be 1 lakh. Let’s learn more.Read also : What is Equity Shares?
Types of shares
1. Preference shares
As the name suggests, this type of share gives certain preferential rights as compared to other types of share. The main benefits that preference shareholders have are:
- They get first preference when it comes to the payout of dividend, 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 three sub- types in preference shares:
- Cumulative preference shares: Cumulative shareholders have the right to receive arrears on dividend before any dividend is paid to equity shareholders. For example, if the dividends on preference shares for the year 2017 and 2018 have not been paid due to market downturns, preferential shareholders are entitled to receive dividend for all preceding years in addition to the current one.
- Non-cumulative preference shares: Non-cumulative shareholders cannot claim any outstanding dividend. These shareholders only earn a dividend when the company earns profits. No dividends are paid for the prior years.
- Convertible preference shares: As the name suggests, these shares are convertible. Convertible shareholders can convert their preference shares into equity shares at a specific period of time. However, the conversion of shares will need to be authorized by the Articles of Association (AoA) of the company.
Read also : What are Preferred and Common Stocks?
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 less voting rights compared to equity shareholders. To dilute the voting privileges, companies provide extra dividend to DVR shareholders. As DVR shares have less voting rights, their prices are also low. The price gap between equity shares and DVR shares is almost 30-40%.
Why Does A Company Issue Shares?
Companies invest in raisingfunds from investors. They also allowstakeholders a stakein the company’s profits.Investing in shares gives better returns on investment than traditional investment options and can help you compound your wealth in the long-run.
DISCLAIMER
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.