Type of Share in Stock Market | Different Between Equity Share and Preference Share

Type of shares: In the past few months, the stock market has been in the news every day. Many people are investing in stocks as a way to grow their wealth and achieve their financial goals. In India alone, there has been a significant increase of 142 lakh retail investors in the fiscal year 2021.

Currently, stocks or equities make up 12.9% of total investments in India. As an investor, it’s important to understand the basics of the stock market and how it works.

What Is the Meaning Of Share?

A share is defined as a piece of ownership within a company. When you own shares, you become a shareholder and have the right to any profits the company earns, which are usually paid out as dividends.

However, you also share in any losses the company may face. Essentially, if you own shares in a company, you own a portion of that company based on the number of shares you have bought.

Type of Share

Type of Share

Shares are mainly divided into two main types:

  1. Equity shares
  2. Preference shares

They change based on their voting rights, treatment and profitability in the event of liquidation.

Equity Shares Meaning

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Equity shares are also called ordinary shares and are the most common type of shares issued by a company. They make up the majority of shares available. Equity shares can be bought and sold by investors in stock markets.

If you own equity shares, you have certain rights. You can vote on important matters related to the company, such as choosing directors or making important decisions. You also have the right to receive dividends, which are a portion of the company’s profits distributed to shareholders. It’s important to note that the dividends you receive as an equity shareholder are not fixed. They can vary depending on the company’s performance and decisions made by its management.

As an equity shareholder, you also take on some risk. If the company faces losses or financial difficulties, you will bear a portion of those losses. However, the maximum amount you can lose is the amount you initially invested in the shares. Your losses are limited to the value of your investment.

Equity shares can be further categorized based on certain factors, but those details are more complex and may vary from company to company. Understanding these basics can help you navigate the world of equity shares and make informed investment decisions.

  • Share capital
  • Definition
  • Returns

Classification Of Equity Shares Based on Share Capital

Let’s take a simpler look at the classification of equity shares based on share capital and definition:

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Based on Share Capital

1. Authorized Share Capital: This is the maximum amount of capital a company can raise by issuing equity shares. It is mentioned in the company’s Memorandum of Associations.

2. Issued Share Capital: This refers to the portion of the company’s capital that has been offered to investors through the issuance of equity shares. It represents the total value of shares issued by the company.

3. Subscribed Share Capital: This is the portion of the issued share capital that has been subscribed or purchased by investors.

4. Paid-Up Capital: It is the amount of money that investors have paid to hold the company’s shares. It is the same as the subscribed share capital because investors pay the entire amount at once.

Based on Definition

1. Bonus Shares: These are additional shares issued to existing shareholders free of cost as a bonus.

2. Rights Shares: These are new shares offered to existing shareholders at a specific price and within a specific period before being available for trading in the stock market.

3. Sweat Equity Shares: These shares are given to employees of the company as a reward for their significant contributions.

4. Voting and Non-Voting Shares: While most shares carry voting rights, a company can issue shares with differential or zero voting rights to shareholders.

Based on Returns

1. Dividend Shares: Some companies choose to pay dividends in the form of new shares, distributed proportionally among shareholders.

2. Growth Shares: These shares are associated with companies experiencing rapid growth. While they may not provide regular dividends, their stock prices tend to increase rapidly, offering capital gains to investors.

3. Value Shares: These shares are traded in the stock market at prices lower than their intrinsic value. Investors anticipate that their prices will appreciate over time, providing them with better returns.

Understanding these classifications can help investors make informed decisions about their investments in equity shares.

Preference Shares Meaning

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Preferential shareholders have certain advantages over ordinary shareholders when it comes to receiving profits and in case of a company’s liquidation. Given below are the different types of shares within this category:

1. Cumulative and Non-Cumulative Preference Shares

If a company doesn’t declare an annual dividend, cumulative preference shareholders have the benefit of carrying forward the unpaid dividend to the next financial year. Non-cumulative preference shareholders don’t have this provision and won’t receive any outstanding dividend benefits.

2. Participating/Non-Participating Preference Shares

Participating preference shareholders have the opportunity to receive additional profits, beyond regular dividends, if the company generates surplus profits. Non-participating preference shareholders only receive regular dividends and do not get a share in the surplus profits.

3. Convertible/Non-Convertible Preference Shares

Convertible preference shares can be converted into equity shares according to the conditions specified in the company’s Article of Association (AoA). Non-convertible preference shares do not have the option to convert into equity shares.

4. Redeemable/Irredeemable Preference Shares

Redeemable preference shares can be repurchased by the company at a predetermined price and within a specific time period. These shares do not have a fixed maturity date. Irredeemable preference shares, on the other hand, cannot be repurchased by the company and do not have any specific conditions for redemption.

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In simpler terms, preferential shareholders receive priority over ordinary shareholders in terms of receiving profits and repayment during a company’s liquidation. Different types of preference shares offer different benefits, such as carrying forward unpaid dividends, participating in surplus profits, converting into equity shares, or being repurchased by the company.

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