A share is a unit of ownership which represents an equal proportion in the company’s capital. A share gives equal claim on profits and losses of the company. A share represents the ownership in the company. Shares are of two types, mainly, preference shares and equity shares. When a person buys any shares in a company, they become the owner of the company. Most companies issue shares in return of a lump sum investment.
Shares in a company are authorized, issued and outstanding. Authorized shares are the maximum number of shares which a company can sell to the outsiders. Issued shares are the shares which have been issued/ sold. Issued shares are the shares which have been allotted to the holders. An outstanding share is a share which is available to be allotted by the investors.
According to Section 43 of the Companies Act, 2013, shares are of two types, namely Equity shares and Preference shares.
Equity Shares
Equity shares are also referred to as the ordinary shares. A major portion of the company’s shares are issued as equity shares. The equity shareholders have a voting right in the companies meetings. They are also entitles to dividends which are declared in the meetings by the Board of Directors. The dividend on the equity shares is not fixed. The dividend depends on the profits which are left with the company after paying all its debts and also after paying interest to the preference share holders, i.e., once the payments have been made to all the debt holders and also interest has been paid to the preference share holders, then only can dividend be declared for equity shareholders.
The dividend on equity shares is not fixed; rather it varies from year to year. Among the other types of shares, equity shareholders are subject to maximum risk. The equity shares are further classified into following shares:-
- Authorized share capital
- Issued share capital
- Subscribed share capital
- Paid-up capital
- Bonus shares
- Right shares
- Sweat equity shares
- Equity shares with voting rights
- Equity shares without voting rights
- Dividend shares
- Growth shares
- Value shares
Preference Shares
Preference shares are a type of shares which are given certain preferential rights over the equity shares. The preferential rights are given to preference shares with respect to payment of dividends and right to get repaid in case of winding up of the company.
When a company earns profits, then after the payment of debts to the debt holder, preference share holders are the first to get the interest before payment to equity share holders. Also, in case of winding up of the company, after the payment of all dues, preference shares are paid up first and then the equity shares are given payment.
Therefore, preference shares enjoy the preferential rights over the equity shares and also are relatively less risk bearing than the equity shares. Preference shares are further divided into following types:-
- Cumulative preference shares
- Non cumulative preference shares
- Participating preference shares
- Non participating preference shares
- Convertible preference shares
- Non convertible preference shares
- Redeemable preference shares
- Irredeemable preference shares
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