Share: Nature and Types

A share is a term often referred to as stake. Whenever a private company goes public, it raises the capital for the organisation by selling shares of the company to the public or investors. Every company’s shares are finite, and a share represents a percentage of ownership in a company or a financial asset. 

All shares are initially issued in primary markets, most probably IPOs (initial public offerings), and further traded in secondary markets like share exchanges. Generally, all firms issue common equity or, say, ordinary shares, general. However, there are mainly two categories of shares: equity and preference shares and both classes have different natures and subtypes of shares. For more advancement, all shared meanings and types are discussed below.

Nature and Types of Shares

Shareholding is a complicated joint-ownership concept. The stockholders jointly own the corporation. Briefly, a share is a moveable asset that can be traded or transferred easily(according to the company’s articles). Stakes are tangible in nature as Contractual claims and are used to derive their value. A shareholder receives a package of rights in the firm in exchange for investing in it, which may vary depending on the type of shares purchased. In the case of preferential shares, the nature of the share adds up with preferential rights. As discussed, there are two types of shares: preferential shares & equity shares.  

Preferential Shares

The shares which have preferential rights during dividend payouts and liquidity distribution of a firm can be termed preferential shares. Preferential shares are also known as ‘Preferred Stock.’ Profit is distributed among all shareholders through dividend payouts and liquidity distribution. Both times, the preferential stakeholders are given more importance than any other shareholders. However, the amount of payouts depends on the firm’s decision. 

The firm’s main objective behind issuing preferential shares is to raise capital for the long term without distributing voting rights to the stakeholders. But, one is allowed to ask for the dividend if it is unpaid for more than two years. Moreover, preferential shares are divided into several classes based on their dividend payouts and shareholder contribution. 

Types of Preferential Shares

There are nine types of preferential shares. They are:

• Redeemable & Irredeemable Preference Shares 

The redeemable or bought-back from an issuer are termed redeemable preference shares. Conversely, irredeemable preference shares are the shares that can’t be bought back. They can’t even be redeemed by the issuer, though; they are called irredeemable preference shares.

• Convertible & Non-convertible Preference Shares

Convertible/Non-convertible preference shares are the shares that are often allowed/disallowed to convert the preference stake to an equity stake. However, there’s some lock-in time before the reversal of stake. 

• Cumulative & Non-cumulative Preference Shares

As the name suggests, the cumulative preference stakeholders have ensured the payment of all dividends regardless of market downturns or other similar situations. However, if the payouts did not occur, the stakeholders would be given the accumulated amount on the following payouts. Conversely, Non-cumulative preference shares don’t provide any securities for unpaid dividends. 

• Participating & Non-participating Preference Shares

These shares often hold extra benefits over other share types. Holders of these classes of shares have the right to ask for profits from the additional earnings of the firm after dividend payouts. Like equity shareholders, these stakeholders get a fixed amount of dividends. As the name describes, Non-participating preference shareholders have no participation and aren’t given rights to ask for profits from the firm. They often receive the previously decided dividend payouts.

• Adjustable Preference Shares 

Stakeholders of these types of shares often receive different dividend payouts from the other stakeholders. The amount can be high also and low too.

Equity shares

These shares are also known as ordinary shares. Though, they don’t hold any preferential rights in holdings. As the term conveys, equity stakeholders have equity in the firm. Generally, all equity shareholders receive dividends after the preferential stakeholders. Moreover, these shareholders are entitled to vote at corporate meetings. They indeed have to be authorised by the board of directors. Stated dividends—the dividend payout changes throughout the year, relying on its profitability. Though, the dividend on these shares is not fixed.  

Other shares

Numerous other types of shares are developed throughout the world, and they all govern various rights and natures. Freezer shares, management shares, capital shares, dividend shares, deadlock articles, and growth shares are some other shares to name.

Conclusion

We learned the nature and types of shares from all the above. We can now say that shares are a type of digital asset which owns tangibility due to contractual claims. Apart from it, we came through two main types of shares: preferential and equity. Preferential shares mean the shares which come with preferential rights, and similarly, equity shares are the shares that reflect the equity at stake. The equity shares are ordinary and don’t hold any preferential rights. Moreover, a comprehensive sub-classifications of preferential shares is also described.