shares and types of share
Definition: A share can be defined as the individual portion of the company’s capital
owned by shareholders. It is the interest which a shareholder has in a company. In other words, share is a unit of
capital measured by a sum of money. The Company Act defines a share as: “The interest in a company’s share
capital of a member who is entitled to share in the income of such company.”
Types of shares
There are two major types of shares. These are Preference shares and Ordinary shares.
(1) Preference shares: A preference share is the type of share which has priority in terms of dividend payment and repayment of capital in the event of winding up. They have a fixed rate of dividends.
Features of preference shares
- Preference shares have no voting rights.
- They have fixed rates of interest.
- Holders receive dividends before others.
- They are entitled to return of capital first at winding up
Types of preference shares
- Cumulative preference shares: Cumulative preference shares have priority in the share of dividends over others. Cumulative preference shares receive arrears of dividends not paid before other shares, i.e when no profit is declared, their dividends will be carried forward to the following year.
Features of cumulative preference shares
- No voting rights
- It has a fixed rate of dividend
- They receive arrears of dividends.
- Participating preference shares are shares which are entitled to further percentage of dividends
after the ordinary shares have received a specified percentage of profits Participating preference shares have the right to participate equally with the ordinary shareholders in surplus dividends apart from their fixed dividends.
Features of participating preference shares
- They receive fixed rate of dividends like other preference shares.
- They also participate in further dividends after all others have been paid
- They usually receive dividends before ordinary shares
Redeemable preference shares: Redeemable preference shares are shares which have prior claims to dividends before all other preference shares.
The owners of the business can buy back these shares after some time. The shares are issued to finance a particular project. The redemption of preference shares must not be regarded as amounting to reduction of capital.
Features of redeemable preference shares
- They have prior claims before of preference shares.
- The can be bought back
- They are issued out to finance a particular project
- Non-cumulative preference shares: In this type of share, the dividend does accumulate from one year to another. Where a company fails to pay dividend in a particular year, it cannot be carried forward.
- Non-participating preference shares: Non-participating preference share are the opposite of participating preference shares. They are not entitled to further dividends after the ordinary shares have been paid.
(2) Ordinary shares
Ordinary shares are also known as equilibrium ordinary shareholders are the real owners of the business. The holders are the risk bearers and they receive their dividends after all other shares have been paid. They can vote and be voted for. They have no fixed rate of dividend.
Features of ordinary share
- There is no fixed rate of dividend
- They have voting rights
- The holders are the real owners of the business
- They are the risk bearers.
- They receive dividends last, after others have been paid
Types of ordinary shares.
- Deferred or founders’ shares: shares are shares which are entitled remainder of profit after all other shares and ordinary) have been paid. They are usually issued to the founders or promoters of the business.
Features of deferred shares
- They have more voting rights.
- They are issued to the founders of the business.
- The holders are entitled to the remainder of the dividends after all others have been paid.
- Preferred ordinary shares: Preferred ordinary shares are shares which receive dividend after the preference shares have been they have preference over other classes of ordinary shares.
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