The registered capital of a company is divided into a fixed number of units. Each of these units is known as a share. Companies issue these shares in order to raise capital.
Types of Shares
There are several types of shares:
The rest of this article provides a description of these different types of shares.
Ordinary or Common or Equity Shares
Holders of ordinary shares do not enjoy a fixed dividend rate. Instead, holders receive dividends only after preference shareholders are satisfied.
They do not receive any dividend if no surplus of profit is left after the preference shareholders are paid off. Ordinary shares are also called common shares or equity shares.
Preference shares are those where the holders enjoy a fixed dividend. Holders enjoy a preference in the receipt of dividends and repayment of capital.
Holders of preference shares receive a dividend payout before ordinary shareholders. Preference shares are divided into the following classes:
- Cumulative preference shares
- Non-cumulative preference shares
- Participating preference shares
- Redeemable preference shares
- Irredeemable preference shares
Cumulative Preference Shares
On these shares, a fixed rate of dividend for each year is payable out of current or future profit.
If the profit in any one year or a series of years is not sufficient to pay, the dividend accumulates and must be paid out of profit available in any future year before the other shareholders can rank for a dividend.
Non-cumulative Preference Shares
In the case of these shares, a fixed rate of dividend is payable only out of the profit of each year. If the profit of any year is insufficient to pay the dividend, no arrears of the dividend are carried forward to the next year.
Participating Preference Shares
Participating preference shares are those which give holders, in addition to a fixed dividend, a right to share in the surplus profits after all other shareholders have received a specified dividend rate.
Redeemable Preference Shares
The holders of these shares are, at the option of the company or after a fixed period, paid back the entire capital they contribute.
Irredeemable Preference Shares
The amount of these shares is not paid during the existence of the company. It means that these shares are only redeemable after the winding up of the company.
These shares are generally issued to the founders/promoters of the company in consideration of the services they render.
Deferred shares receive their name because the dividend on them is paid after all other classes of shareholders have been fully satisfied. These shares are also known as founder’s shares.