Define Shares. What are the Types of Shares in Detail?

There are different types of shares, and you must be well familiar with all of them. But first, let’s talk about shares. You may define shares as a smaller part of the capital that is known as “Share” and a person, who owes shares is known as the shareholder.

We may also define shares as one of the units in the company into which the total capital of the company is divided. Justice Farewell defines Share in the following words “A share is the interest of the shareholder in the company. It is measured by the sum of money for liability in the first place and interest in the second place”.

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

1. The share of a company shall be a moveable property. It is transferable in the manner provided by the articles of the company.
2. The share capital is non-refundable except in the case of winding up and reduction of capital.
3. Each share in a company shall have a distinctive number.

Types of Shares

Basically, there are three types of shares into which the whole capital of the company is divided.

1. Equity shares
2. Preference shares
3. Deferred Shares

1. Equity Shares

Equity shares are also called ordinary shares. The holders of equity shares are the real owners of a company. The ordinary shareholders have voting rights in the meetings of the company. They are entitled to receive dividends as are declared by the board of directors. The equity share capital cannot be redeemed during the lifetime of the company.

Merits of Equity Shares

The merits of equity shares are as under:-

01- Venture capital. Equity Shares are the most important and popular type of shares. It is, therefore, called the venture capital of the company.

02- No burden on a company’s resources. Since the dividend is to be paid out of the profit of the company, therefore they impose no load on the resources of a company.

03- Provision of long term finance. The equity shares provide long term finance to the company.

04- No charge on the assets. The equity shares do not create any charge on the assets of a company. The Company can raise further funds. If it desires, through the mortgage of property or other assets.

05- Payment of profit. Equity shareholders are paid profit after all the other claims are met by the company.

06- Rate of dividend. The rate of dividend on ordinary shares depends upon the profit of the company.

2. Preferences Shares

Preferences Share as the name suggested, it has 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 compensation of dividends. Whenever the company distributes profits, the dividend is first paid on preferences share capital.
2. In case of winding up the company, the preferences shareholders have a prior right regarding repayments of capital.

Classes of Preferences Shares

The main types of preference shares are as under:-

01- Cumulative preference shares. In this type of preference share, dividends were paid also for those years in which no profit is earned. Whenever the company declares profits, the cumulative preference shares are paid dividends for all the previous years in which dividends could not be declared.

02- Non-cumulative preference shares. In this type of preference shares, the holders do not have any claim regarding the amount outstanding of dividends. They are paid dividends if a company earns a profit.

03- Convertible preference shares. The convertible preference shares are those which the holders can convert into equity shares at a specified time. The right of conversion is to be authorized by the Articles of Associations of the company.

3. Deferred Shares

Deferred Shares are also called founders Shares. They were used to be issued to the promoters of the company. Dividend on deferred shares was paid after the claim of all other shareholders has been met including equity shareholders. The deferred shareholder has one vote. These shares enabled the promoters to control the working of the company with a very small investment.