After knowing how the stock market works, in this article we will discuss the Types of Shares in Stock Market and its features in a simple and easy way, and try to understand its various important aspects; So read it till the end for better understanding.
Note – If you want to understand the basics of share market from zero level then you should start with Part 1. – Share Market and Related
| What are Shares?
Share means to share or share things of our share with others, such as we share our food, share our feelings etc.
But talking in the sense of the market, we share our share of things only when we need something in return. What is needed here is money.
Capitalism says that do not be satisfied with the wealth or capital you have now, but increase it and keep increasing it.
Obviously it will grow only when we increase our business, business will grow only when productivity increases and productivity will increase only when additional capital is put into it.
This capital can be brought either by borrowing (loan) or by selling shares of your business.
| Types of Shares
Broadly speaking, the stock is divided into two parts. 1. Equity share and 2. Preference share
⚫ One is the owner of the company who has the highest number of shares in the company and the other is the common share holder like us and you who buy shares in a company through the stock market.
Together these two are called Equity Shares or Ordinary Equity Shares. On the other hand, talking about the preference share, as the name suggests, it gets some special treatment, that is, preference is given to the preference share holder in some cases.
Q. When does a company issue equity shares and when does it issue preference shares?
Many times when a company takes a lot of loans and does not want to take any more loans or its situation has become such that it cannot afford more loans, then it issues equity shares .
⚫ On the other hand, if we talk about the preference share, then when the company needs immediate money or the company feels that in the coming time everything will be fine and the company will recover again or even if such company feels right. So they issue preference shares.
One advantage of preference shares is that the company can take back its shares whenever it wants, that is, by returning the principal amount to the investor.
| Difference between Equity Share and Preference Share
⚫ Talking about equity shares, these are one of the most common types of stocks. If the share price goes up, the equity shareholder will gain and if it goes down, it will be a loss.
But when it comes to preference shares, it gets a fixed return. It doesn’t matter if the share price goes up or down.
⚫ Whatever profit the company makes, if the company wants, it may or may not share that profit with the equity shareholder.
But in the case of preference share, the first right on the dividend / profit of the company belongs to the preference share holder only. After distributing it, if there is anything left, the equity shareholder can get it.
⚫ If the company sinks, then the preference shareholder is given preference in the money received by selling its assets, after the compensation, if anything remains, then the equity shareholder will get it.
⚫ Equity shares can be bought and sold in the stock market, so whether equity share holder will be profit or loss depends on the market i.e. equity share holder takes a lot of risk, while talking about preference share, he bought it- Cannot be sold and his returns are also fixed so he takes very little risk.
⚫ Equity share holders get voting rights in the company and can also be a part of the management, so they can control the company to a great extent.
Whereas the preference share holder does not get voting rights nor can it be a part of the management, hence it cannot control that company even though it is a shareholder in the company’s dividend.
⚫ Everyone can invest in Equity Shares because its share price is very low. Whereas in preference shares, especially the big capitalist class, or venture capital firms, etc. invest, because the common investor does not have that much money.
| Classification of Equity Shares
Equity shares can be classified into the following parts according to the type of share capital. We have discussed some of these before.
| Authorized share capital : This is the maximum amount of capital a company can issue. It can also be extended. But for this, the company has to fulfill certain formalities and also pay necessary fees to the legal entities.
| Issued share capital : It is that part of the authorized capital that the company has issued to its investors.
| Subscribed Share Capital : Subscribed shares are shares that investors have promised to buy. That is, it refers to that part of the issued capital by the company, which the investor accepts or agrees to buy that part. These shares are usually subscribed as part of an initial public offering (IPO).
| Paid-up Capital : It refers to that part of subscribed capital for which investors pay.
There are terms associated with some other types of shares that are frequently used, such as
⚫ Rights Share : These are the types of shares that the company issues to its already existing shareholders. Such stock is issued to protect the ownership rights of existing shareholders, hence it is also called rights issue.
⚫ Bonus Shares : Shares which are provided free of cost by the company to its old shareholders. It is also called scrip share.
⚫ Sweat share : When employees or directors perform their roles exceptionally well, sweat shares are issued to reward them.
| Types of Preference share
| Cumulative and non-cumulative preference shares
As we know, in case of preference shares, the company promises a fixed return to its investors. Cumulative preference share means that if the company fails to return as much as it has promised to its investors in any year, then it will be added to the next year’s return. That is, next year he will have to give returns for both the years.
In the case of non-cumulative preference shares, nothing like this happens. If the company is not able to pay the return in any year, then in the next year only it will pay the return of the same year and not the previous year.
| Participant and non-participating preference shares
Participating preference shareholders not only get the benefit of preference share but also get the benefit of equity share. For example, if the company has earned profit in excess of the prescribed dividend, then the participating preference shareholders will get the same amount as they already have but in addition to that higher share.
The non-participating preference shareholders are not entitled to participate in profits after the equity shareholders are paid. So if a company makes any additional profit, they will not get any additional dividend. They will only receive their fixed share of dividend every year.
| Convertible and non-convertible preference shares
Convertible preference shareholders have the option or right to convert the preference shares into ordinary equity shares.
Non-convertible preference shares do not have the right to be converted into equity shares.
| Redeemable and non-redeemable preference shares
The company issuing the redeemable preference shares can buy back its shares. That is, the company can recover its share by returning the amount of rupees for which the company had issued that share.
After how much time the company can withdraw its shares, it is decided at the time of issuing the shares.
There is no such thing in the case of non-redeemable preference shares.
Overall this is the type of share, hope you have understood it very well. You have bond markets, derivatives, mutual funds, insurance, cryptocurrencies and more to read right now. You must read all these articles for a better understanding of the market.