types of shares. Shares are units of ownership in a company. When a company decides to raise capital, it can issue shares to investors in exchange for their investment. These shares represent a portion of ownership in the company and entitle the shareholder to certain rights, such as voting rights and a share in the company\’s profits.
There are different types of shares that a company can issue. The most common types include:
- Common Shares: Also known as ordinary shares or equity shares, common shares represent the basic ownership of a company. Shareholders of common shares have voting rights in the company\’s decision-making processes, such as electing the board of directors and approving major corporate actions. They may also receive dividends if the company distributes profits to shareholders.
- Preferred Shares: Preferred shares, also called preference shares, give shareholders certain preferences over common shareholders. They often have a fixed dividend rate, meaning that preferred shareholders receive a predetermined dividend amount before any dividends are distributed to common shareholders. Preferred shareholders may have limited or no voting rights, depending on the company\’s bylaws.
- Non-Voting Shares: Some companies issue non-voting shares, which do not carry voting rights. These shares allow investors to participate in the company\’s financial success through dividends or capital appreciation but without having a say in the company\’s decision-making processes.
- Redeemable Shares: Redeemable shares are shares that the company can buy back from the shareholders at a predetermined price and time. This feature provides flexibility to the company to repurchase shares under specific circumstances, such as changes in ownership or financial restructuring.
- Convertible Shares: Convertible shares are a type of security that can be converted into another class of shares, typically common shares, at a predetermined conversion ratio and within a specified time period. This feature allows shareholders to convert their shares into a different class of shares, usually when certain conditions are met.
- Cumulative Preferred Shares: Cumulative preferred types of shares ensure that any unpaid dividends from previous periods accumulate and must be paid before any dividends can be distributed to common shareholders. This feature provides additional security to preferred shareholders by guaranteeing that they will eventually receive their dividends.
It\’s important to note that the specific types of shares and their characteristics may vary depending on the company\’s jurisdiction and its articles of incorporation or bylaws. Additionally, companies can create different classes of shares with varying rights and privileges to meet their specific needs.
Definition: A share can be defined as the individual portion of the company’s capital
owned by shareholders. It is the interest that a shareholder has in a company. In other words, a 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 types of 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 types of 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 a 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 a 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 a reduction of capital.
Features of redeemable preference shares
- They have prior claims of preference shares.
- They can be bought back
- They are issued 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 a dividend in a particular year, it cannot be carried forward.
- Non-participating preference shares: Non-participating preference shares 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 the 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 dividends after the preference shares have been they have preference over other classes of ordinary shares.