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What is Share?

A share means a unit representing a partial ownership stake in the company. Investors owning them are called shareholders. Equity and preference shares are popular types of shares. Both provide the company with funds and shareholders with an ownership stake in the company.

Types of Shares

Mainly there are two types: Equity and Preference shares. 

Equity Shares

Equity shares are the financial instruments that represent partial ownership in the company and grant the shareholder voting rights that allow them to have a say in company matters. Using their voting rights, equity shareholders can elect the board of directors.

Equity shareholders get rewarded for investments in two ways, dividends and capital appreciation (the difference between a share’s buying and selling price). However, it is not mandatory for companies to pay dividends to equity shareholders. They may be rewarded with significant capital appreciation by staying invested for a long time.

Classification of Equity Shares Based on Share Capital

Authorised Capital

Authorised capital means the maximum capital company can acquire by issuing equity shares. Companies must mention the amount of authorised share capital in their Memorandum of Association and can increase it only after following legal formalities. The companies may or may not use the entire amount of authorised share capital as they may need to raise funds in future.

Issued Capital

Issued capital is the nominal value of shares issued by the company and cannot exceed the company’s authorised share capital. Suppose a company has an authorised capital of ₹50,00,00,000, and it issues a total of 30,00,000 shares of ₹10 each; its issued capital is ₹3,00,00,000.

Subscribed Capital

As the name implies, subscribed share capital is the amount of issued capital that investors have subscribed to. If the investors subscribe to all the shares the company issued, the issued and subscribed capital would be the same. 
If the company doesn’t receive a subscription for all the issued shares, the subscribed share capital would be less than the issued share capital.

Paid-up Capital

Paid-up capital is the amount of capital the company has received against the number of shares it issued. The company usually receives paid-up capital when it brings Initial Public Offering (IPO), as it is when the company receives money from investors in exchange for shares. 
If the investors pay the full amount they have subscribed, the subscribed capital and paid-up capital would be the same.

Classification of Equity Shares Based on Definition

Bonus Shares

Bonus shares are the shares the company offers to its existing shareholders as a bonus, i.e. without any additional cost. The existing shareholders get additional units, in proportion to the number of shares they own, with their original investment being the same. Many times, bonus issue is an alternative to cash dividends.

Rights Shares

If the company offers the existing shareholders the right to buy shares in a new issue before the general public, such offerings are known as rights shares. The companies offer rights issue to the existing shareholders proportional to the number of units they hold.

Voting and Non-voting Shares

Equity shares usually provide voting rights to investors. However, companies may sometimes offer shares with the pre-stated condition that the shareholders will get differential or no voting rights. In such cases, the company may offer more returns than ordinary ones.

Sweat Equity Shares

Sweat shares refer to those shares that the company offers to its employees or Directors to reward them at a price lesser than par value or for non-cash consideration.

Classification of Equity Shares Based on Returns

Dividend Stocks

A dividend means a part of the earnings the company decides to distribute to its shareholders. Dividend stocks regularly and periodically pay dividends to shareholders, which may signify that the company is constantly recording profits.

Growth Stocks

Growth stocks are likely to experience significant price growth, resulting in increased shareholder returns. Such stocks may or may not pay dividends and may carry higher risks. However, investors seeking significant capital gains may find them suitable.

Value Stocks

Each stock has a fair or intrinsic value which may or may not be equal to its market price. Value stocks are those which have a market price lower than their fair value. Investors purchasing such stocks can benefit when they reach or exceed their fair value.

Read About Growth Stocks vs Value Stocks

Preference Shares

Preference shares are also financial securities representing the shareholder’s partial ownership of the company. Such shares involve combined features of debt securities and equities. Similar to debt securities, they usually offer fixed returns, i.e. fixed dividends. Similar to equities, they also trade on the stock exchanges.

Preference shareholders usually get dividends. They enjoy preference over equity shareholders for dividend payments and repayment if the company goes bankrupt.

Various types of preference shares are as below:

  • Cumulative preference shares
  • Non-cumulative preference shares
  • Convertible preference shares
  • Non-convertible preference shares
  • Participating preference shares
  • Non-participating preference shares
  • Redeemable preference shares
  • Irredeemable preference shares

Equity and preference shares have few similarities and few differences. Both have their own advantages and disadvantages. Equity shares may provide greater returns, but returns are not assured. Preference shares offer fixed returns, though probably lesser than equity shares. One can decide what to invest in after considering the pros and cons of both.

Read the Difference between Equity Shares and Preference Shares

Frequently Asked Questions

Why do companies issue shares?

Companies issue shares to fulfil their financial requirements for growth, expanding operations, developing new products, research and developments, etc. As companies are not required to repay these funds to investors, they can freely use them for efficient functioning.

What rights do equity shareholders have?

Equity shareholders possess the following rights:
Voting rights
Transfer ownership
Inspect the company’s account registers and books
Take part in profits
Claim capital in the case of company liquidation
Preemptive rights to buy shares in the rights issue
Sue the company for wrongful actions

What rights do preference shareholders have?

Preference shareholders have the following rights:
Transfer ownership
Inspect the company’s account registers and books
Claim dividends
Claim capital in the case of company liquidation
Sue the company for wrongful actions

Where can I buy and sell shares?

You require a Demat account and trading account to buy and sell shares. Once you have that, you can easily buy or sell shares from stock exchanges through your broker.

Are shares risk-free investments?

No, similar to all types of investments, shares also involve risks. Liquidity risks, market risks, inflationary risks, regulatory risks, etc., are some common risks associated with stock investments.

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