What are the Different Types of Shares?

One of the most fundamental questions that you may have as a beginner in the stock market may be this — ‘What is a share?’ To understand the meaning of shares, it’s essential to answer another related question that is equally crucial — ‘What is share capital?’

In this article, we’ll take a closer look at the answers to these questions, understand the definition of shares and share capital, and get to know the different types of shares available in the Indian financial markets. 

What is share capital and what is a share?

The term share capital refers to the total amount of money that owners have invested in a company in the form of equity and preferred stock. The funds obtained by raising share capital can be used by a company to further its business operations, repay its debt or expand its business. 

This brings us to the concept of shares. The simplest definition of a share is that it represents one unit of ownership in a company. Every person who holds a share in a company is considered a shareholder and a partial owner of that company. 

That said, there are different types of shares, as outlined below. 

The different types of shares

Depending on the type of rights that they offer, shares can be broadly classified as equity and preference shares. Here is a closer look at these two broad categories as well as the many subcategories of shares within them. 

Equity shares

Equity shares, also known as common stock or ordinary shares, are the most common types of shares that companies issue to the public in general. These shares come with the following key features: 

• They give voting rights to shareholders
• They give shareholders the right to surplus profits of the company 
• They give shareholders the right to receive any dividends declared on their shares
• They are transferable and tradable in the secondary market (in the case of listed companies)
• They bear a higher degree of risk than preference shares

Equity shares can further be classified into the following subcategories: 

• Authorised equity share capital

This is the highest amount of share capital that a company can raise. It is specified in the company’s Memorandum of Association (MoA). 

• Issued equity share capital

This is the portion of the authorised capital that a company issues to its investors to raise capital for its operations and business requirements. 

• Subscribed equity share capital

This is that portion of the issued capital that investors have subscribed to or have agreed to purchase. 

• Paid-up equity share capital

This is the portion of the subscribed share capital for which investors have paid up. Generally, since companies may accept the total subscription amount completely, the paid-up capital is often the same as the subscribed capital. 

• Bonus shares

Bonus shares are additional equity shares issued to existing equity shareholders instead of  dividends. These shares are issued free of cost. 

• Rights shares

To protect the rights of ownership of existing shareholders, companies may issue rights shares at discounted prices to current equity shareholders, who can choose to exercise their rights and purchase the shares at prices lower than the prevailing market rate. 

• Sweat equity shares

Sweat equity shares are issued to the employees and directors of a company, often as a reward for excellent contributions made to the company. This helps the company retain skilled employees within the organisation for a longer period. 

Preference shares

As the name indicates, preference shares are those shares that offer special rights or preferential priority over ordinary shares. Preference shares come with the following key features:

• They offer shareholders preference in dividend payment 
• They give shareholders the right to be paid off before equity shareholders in case the company is liquidated 

Preference shares can also be classified into different subcategories, based on their distinct characteristics, as outlined below. 

• Participating vs. non-participating preference shares

Participating shares in this category gives shareholders the right to the surplus profits that remain after a company has paid out dividends. Non-participating preference shares do not offer any such right. 

• Cumulative vs. non-cumulative preference shares

If a company does not declare dividends for a few years, the right to receive dividends for those years is carried forward and accumulated in the case of cumulative preference shares. However, non-cumulative preference shares do not offer the benefit of accumulated dividends. 

• Redeemable vs. non-redeemable preference shares

Redeemable preference shares can be repurchased or claimed by the issuing company at a predetermined time and price. This is not the case with non-redeemable preference shares. 

• Convertible vs. non-convertible preference shares

You can convert convertible preference shares into ordinary equity shares if certain specified conditions are met. Non-convertible preference shares do not have this feature. 

Conclusion

Getting to know the meaning of shares and the different types of share capital is one of the most fundamental steps you can take to become financially literate. Now that you are aware of these details, you can proceed to build on this knowledge and get to know the share market better. This will help you plan your equity investments more prudently and beneficially, so you can attain your financial goals easily.