A company can raise money from the public by issuing shares. The money invested by the public in the company is known as Share Capital. The public that buys the shares of this company in return receives the shares of the company or parts of profit. The people who buy the shares of the firm are called Shareholders. The share capital is divided into small parts, which are known as Shares. It is a document that acknowledges the ownership of the firm. Shares can be issued at par and premium. Shares also used to be issued at a discount, but in the Companies Act 2013, issuing of shares at discount became prohibited. 

There are two types of shares: 

  •     Preference Shares 
  •     Equity Shares

Share Capital

Being an artificial person, a company cannot raise funds for itself. So it issues shares in the public to raise funds. These funds or capital is known as Share Capital. Share Capital can be subdivided into more types:

  •     Authorised Capital
  •     Issued Capital
  •     Subscribed Capital
  •     Called-up capital
  •     Paid-up capital

Shares

The money invested by the public to raise funds for the company is known as Share Capital. Any person who owns a share of a company is called a shareholder and is considered as an owner of the company. These shares can be of two types which are Preference Shares and Equity Shares.

Types of Shares

Small parts in which share capital is divided are known as Shares. These shares can be of two types:

  • Equity Shares: There is no fixed rate of dividend paid to the equity shareholders. They do not hold any preferential right in the repayment of capital, distribution of dividends, and part of the profit.
  • Preference Shares: Preference Shares are also known as preferred stock. Preference shareholders have the right to be paid a fixed amount of dividends. It is to be paid before any dividend is paid to the equity shareholders. These shares can be further subdivided into eight types:
  • Cumulative Preference Shares: If the shareholder missed receiving a dividend in the past, then it is being accumulated till it is fully paid. 
  • Non-cumulative Preference Shares: If the shareholder missed receiving a dividend in the past, then the amount will not be accumulated, and the shareholder will get nothing.
  • Participating Preference Shares: The shareholder gets the right to participate in the profit earned by the firm.
  • Non-participating Preference Shares: The shareholder does not get the right to participate in the profit earned by the firm.
  • Redeemable Preference Shares: These preference shares can be redeemed anytime by the firm as they do not have a maturity date.
  • Irredeemable Preference Shares: These preference shares can only be redeemed before the winding up of the firm.
  • Convertible Preference Shares: These preference shares have the option of converting into equity shares.
  • Non-convertible Preference Shares: These preference shares can not be converted into equity shares.

Difference between Preference Shares and Equity Shares

Basis of differentiation

Preference Shares

Equity Shares

Meaning

Preference shares are subdivided into further types, i.e. Cumulative or Non-Cumulative, Redeemable or irredeemable, and participating and non-participating. It is because preference shareholders have a right to the profits of the firm to a limited extent. These shareholders have the right to be paid a fixed amount dividend. It is to be paid before any dividend is paid to the equity shareholders.

There is no fixed rate of dividend paid to the equity shareholders. They do not hold any preferential right in the repayment of capital, distribution of dividends, and part of the profit. 

Voting Rights

These shareholders do not have voting rights.

These shareholders have the right to vote.

Payment of Dividend

Preference Shares is paid a dividend before the payment of dividend in equity shares.

Equity Shares receive dividend after it is paid in Preference Shares.

Merits of Preference Shares

  •     They are paid a dividend before Equity Shareholders.
  •     They have a right to participate in the profit of the company.

Merits of Equity Shares

  •     They hold voting rights.
  •     They are the real owners of the company. 

Demerits of Preference Shares

  •     They do not have voting rights.
  •     It is a costly source of finance.

Demerits of Equity Shares

  •     The risk is very high.
  •     There is no fixed dividend.

Conclusion

A company is a legal entity created by a group of people to work towards achieving a common goal. The capital of a firm is raised by a lot of people who are the real owners of the firm and are known as shareholders. Shares are the small units in which share capital is divided into. There are two types of shares, Preference Shares and Equity Shares.