What is a Share: Meaning and Types of Shares
- 4m0•
- 17 Aug 2023
When delving into stock market trading and finance, the term "share" takes center stage. Shares are fundamental units of ownership in a company, granting individuals a stake in its assets, profits, and decision-making processes. They play an important role in the share market.
What is Share?
At its core, a share represents a piece of ownership in a corporation. When an individual purchases company shares, they become a shareholder, entitling them to a portion of the company's earnings and assets. A stock certificate, a digital entry, or a simple digital ledger entry symbolize this ownership. Shares enable individuals to become stakeholders in a company, aligning their interests with its success.
Types of Shares
1. Equity Shares
Equity shares, often known as ordinary shares, are among the most prevalent categories. These shares represent tangible evidence of an investor's ownership within the company. Notably, equity shareholders shoulder the greatest risk exposure. Possessing these shares grants individuals the authority to participate in company decision-making through voting privileges. It's worth highlighting that equity shares can be traded between investors, and the dividend payout corresponds to a portion of the company's profits.
It's important to underscore that equity shareholders are not entitled to a fixed dividend amount. Remarkably, the financial liability of an equity shareholder is confined to the extent of their initial investment. However, it's essential to acknowledge that these shares do not entail preferential rights regarding ownership hierarchy. That said, there are different types of equity shares (see table).
Authorized Capital - Authorized capital signifies the utmost amount of capital that a company can amass through the issuance of equity shares.
Issued Capital - Issued capital refers to the nominal denomination of shares officially distributed by the company, limited by the upper limit of the company's authorized share capital.
Subscribed Capital - Subscribed share capital, as its name suggests, refers to the portion of the issued capital that investors have committed to. When investors subscribe to the entirety of the company's issued shares, the subscribed and issued capital align perfectly.
| Equity Shares Based on Share Capital | mobile_header | Equity Shares Based on Definition | Equity Shares Based on Returns |
|---|---|---|
Authorized Capital - Authorized capital signifies the utmost amount of capital that a company can amass through the issuance of equity shares. | Bonus Shares - Bonus shares, often scrip dividends or capitalization issues, present a rewarding proposition for existing shareholders. The company bestows these additional shares upon shareholders without necessitating any extra financial outlay. | Dividend Stocks - A dividend is a part of a company's earnings that it chooses to allocate to its shareholders. Dividend-paying stocks consistently and at intervals distribute dividends to shareholders, potentially indicating the company's consistent profitability. |
Issued Capital - Issued capital refers to the nominal denomination of shares officially distributed by the company, limited by the upper limit of the company's authorized share capital. | Rights Share - When a company extends the privilege to its current shareholders, enabling them to acquire shares from a fresh offering ahead of the general public, such offerings are recognized as rights shares. These rights issues are tailor-made for existing shareholders, aligning with the principle of proportional allocation based on the number of units they currently possess. | Growth stocks - Growth stocks can undergo substantial price appreciation, leading to amplified returns for shareholders. These stocks could either offer dividends or not and might entail heightened levels of risk. Nevertheless, these stocks appeal to investors keen to invest in substantial capital appreciation. |
Subscribed Capital - Subscribed share capital, as its name suggests, refers to the portion of the issued capital that investors have committed to. When investors subscribe to the entirety of the company's issued shares, the subscribed and issued capital align perfectly. | Voting and Non-voting Shares - Shares in a company can be categorized into voting and non-voting shares. Generally, equity shares allow investors to participate in company decisions through voting. Yet, there are instances when companies introduce shares that come with predetermined variations in voting rights or none. In these situations, the company might compensate for the differential voting rights by offering enhanced returns compared to regular equity shares. | Value Stocks - Every individual stock possesses an intrinsic value, which may or may not align with its market price. Value stocks are characterized by a market price beneath their intrinsic value. Investors who acquire these stocks stand to gain when their value equals or surpasses the intrinsic assessment. |
2. Preference Shares
Preference shares are financial instruments that signify the shareholder's partial ownership within the company's framework. These shares encompass a fusion of attributes found in both debt securities and equities. Much like debt securities, they typically present predictable yields, often in fixed dividends. Simultaneously, akin to equities, they are actively traded on various stock exchanges.
Dividends are a customary privilege for preference shareholders. Notably, they hold precedence over equity shareholders regarding dividend disbursement and reclaiming investments in scenarios of corporate insolvency.
Types of shares under preference shares include:
- Cumulative and non-cumulative shares:
For cumulative preference shares, if the company opts not to declare dividends in a given year, the dividends are rolled over and added to the total. These accumulated dividends take precedence when the company generates profits subsequently. On the other hand, non-cumulative preference shares do not amass dividends. This implies that if the company does not register future profits, no dividends will be distributed.
- Participating and non-participating shares:
Participating and non-participating preference shares offer distinct rights to shareholders. With participating preference shares, shareholders are privileged to partake in surplus profits beyond the distributed dividends to equity shareholders. This means that during prosperous years, these shareholders are eligible for supplementary dividends exceeding the established fixed dividend amount.
On the other hand, non-participating preference shareholders lack the entitlement to engage in profit-sharing once equity shareholders have received their dividends. Consequently, non-participating shareholders will not receive extra dividends if a company generates surplus profits. Their compensation remains confined to the predetermined dividend portion allocated annually.
- Redeemable and Irredeemable preference shares:
Redeemable preference shares refer to those that the issuing company retains the right to reclaim or repurchase. This action can occur at a predetermined price and a specified time without a set maturity date. As a result, these shares are perpetual, freeing companies from any obligation to make payments after a fixed period.
To Conclude
Shares are the bedrock of investment in publicly traded companies. They empower individuals to become part-owners of businesses, offering a slice of profits and a voice in decision-making. The array of share types provides investors with various options to tailor their investments according to their preferences and objectives.
Whether it's common shares, preferred shares, or any other types, shares remain a vital component of the financial world, offering opportunities for growth and wealth creation.
What is Share FAQs
Share gives you ownership in a company, and broadly, there are two types of shares - equity and preference.
A company divides its capital into shares, each representing a unit of ownership and being offered for sale to raise capital for the company.
Owners of ordinary shares typically receive three characteristic benefits: voting rights, gains, and limited liability.
