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What are the different Types of Shares

What is Shares:

The capital of a company is divided into several small units and each unit is called a share, a share in a company is one of the units into which the total capital of the company is divided. A share thus means a share in the share capital of a company.

According to the Justice Farewell, “a share is the Interest of the shareholder in the company it is measured by the sum of money for the purpose of liability in the first place and of interest (dividend) in the second place”

Holders of the shares are called shareholders or members of the company.

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Nature of Share. The share of a company shall be movable properly . it is transferable in the manner provided by the articles of the company.

  • The share capital is nonrefundable except in the case of winding up and reduction of capital
  • Each share in a company shall have a distinctive number

Types of Shares:

The following types of shares are discussed below.

Equity or ordinary shares :

Ordinary shares are also called equity shares. The holder of ordinary or equity shares are the real owners of a company. The ordinary shareholders have voting rights in the meeting of the company. They are entitled to receive a dividend as are declared by the board of directors. The equity shares capital cannot be redeemed during the lifetime of the company.

Advantages of ordinary shares or equity shares:

  1. Venture capital: ordinary shares are the most important and popular type of shares it is , therefore, called a venture capital of the company.
  2. No burden on  company’s resources: since the dividend is to be paid out of the profit of the company , therefore they impose no burden on the resources of a company.
  3. Provision of long-term finance. The equity or ordinary share provides long-term finance to a company.
  4. No charge on the assets: the ordinary shares do not create any charge or the assets of a company. The company can raise further funds. If it desires, through mortgages of property or other assets.
  5. Payment of profit: equity shareholder is paid profit after all other claims are met by the company
  6. Rate of dividend:  the rate of dividend on ordinary shares depends upon the profit of the company

Before the issue of company’s ordinance 1984, the following two types of shares were issued by the public company for moping up funds.

  1. Preference Share:

Another type of shares is Preference shares, as the name suggests have certain preferences as compared to other types of shares.  The main preferences of these shareholders over others, in brief, are as under.

  1. The first preference is for payment of dividend . whenever the company distributes profits. The dividend is first paid on preference share capital.
  2. In a case of winding up the company, the preference shareholders have a prior right in regard to repayment of capital.

Types of preference shares:

The main types of preference shares are as under:

  1. Cumulative preference shares:

These shares carry the right to claim dividend for those years also for which there were no profits. Whenever, the company declares profits, the cumulative preference share re paid dividend for all the previous years in which dividend could not be declared.

  1. Non-cumulative preference shares:

The holders of these shares have no claim for the arrears of dividend. They are paid the dividend if a company earns profits.

  1. Convertible preference shares:

The convertible preference shares are those which the holders can convert into equity shares at specified period of time. The right of conversion is to be authorized by the Articles of Association of the company.

  1. Deferred shares:

Deferred shares also called founders share were used to be issued to the promoter of the company. The dividend on deferred shares was paid after the claims of all other shareholders had been met including equity shareholders. The deferred shareholders had one vote. These shares enabled the promoters to control the working of the company with a very small investment.

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About the author

Salman Qureshi

Salman Qureshi is an Accountant by profession & he loves to write on Commerce & Management Sciences Subject to assist Students. Hope you guys will like his effort.

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