Shares: Definition

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

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.

Deferred Shares

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.

Frequently Asked Questions

What are shares?

Shares is the value of the company owned by all shareholder.

How many types of shares are there?

There are several types of shares. Ordinary or common or Equity Shares, preference shares, and deferred shares are some of the types of shares that exist in a company.

What are ordinary shares?

A share that has voting rights is known as an ordinary share. As the name suggests, it entitles the shareholder to vote at the time of the company's general body meeting or agm.

What are preference shares?

Preference or preemptive shares are those in which holders receive a fixed dividend every year throughout the life of the company. The amount of dividend is decided before the distribution of profit on ordinary shares.

What are deferred shares?

Deferred shares are those in which no dividend is payable to the holders by the company during its lifetime.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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