Nature and Classes of Shares - Who are Shareholders?

Understanding the dynamics of shares and shareholders is fundamental to grasping how businesses operate and grow. Shares represent ownership in a company and come in various forms, each with distinct characteristics and implications for the company and the investor. Shareholders, the individuals or entities that own these shares, play a crucial role in the company's governance and financial stability. This article delves into the nature and classes of shares, shedding light on their unique features and the rights they confer upon shareholders.

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What are Shares?

Who are Shareholders?

Nature and Classes of Shares

Preference shares

1. Dividend Priority : Preference shareholders receive dividends before common shareholders. These dividends are usually fixed and can be cumulative or non-cumulative.
2. Fixed Dividend : The dividend rate for preference shares is typically fixed, providing a predictable income stream to shareholders.
3. Preference in Liquidation : In the event of the company’s liquidation, preference shareholders have a higher claim on the company's assets than common shareholders. They are paid out after debt holders but before common shareholders.
4. Non-Voting : Preference shares generally do not carry voting rights in the company’s general meetings, although some may gain voting rights if dividends are not paid.
5. Redeemability : Some preference shares are redeemable, meaning the company can buy back the shares at a predetermined price after a certain period.
6. Convertibility : Convertible preference shares can be converted into a specified number of common shares, providing potential for capital appreciation.
7. Callability : The issuing company can repurchase callable preference shares at its discretion, often at a premium over the issue price.
8. Stability : Preference shares are generally more stable than common shares due to the fixed dividend and priority in asset distribution.
9. Cumulative vs. Non-Cumulative :

• • Cumulative Preference Shares: If dividends are not paid in any year, they accumulate and must be paid out before they can be paid to common shareholders.
  • Non-Cumulative Preference Shares : Dividends do not accumulate if not declared; if the company does not pay the dividend in any year, shareholders cannot claim it.

• Cumulative Preference Shares : These shares accumulate unpaid dividends. If a company does not declare a dividend in any year, it is carried forward and must be paid out before any dividends are paid to common shareholders.

• Non-Cumulative Preference Shares : These shares do not accumulate unpaid dividends. If the company does not declare a dividend in any year, shareholders cannot claim it in the future.

• Redeemable Preference Shares : The issuing company can buy back these shares at a predetermined price after a specified period.

• Non-Redeemable Preference Shares : These shares cannot be bought back by the company during its lifetime.

• Convertible Preference Shares : These shares can be converted into a specified number of common shares at the shareholder's or the company's option.

• Non-Convertible Preference Shares : These shares cannot be converted into common shares.

• Participating Preference Shares : These shares provide the right to participate in additional company profits after dividends have been paid to common shareholders.

What is the Equity Share?

• Ownership Rights : Equity shareholders are partial company owners, allowing them to participate in key decisions, such as voting for the board of directors and influencing major corporate policies.
• Dividend Distribution : Equity shareholders can receive dividends, which are not fixed and depend on the company's profitability and decision to distribute earnings. They are paid after preference shareholders and creditors.
• Residual Claim on Assets : In the event of liquidation or bankruptcy, equity shareholders have a residual claim on the company's assets, meaning they receive the remaining assets after all debts and obligations are settled.
• Voting Rights : Common shareholders typically have voting rights in the company, with votes often corresponding to the number of shares held. This allows them to influence the company's direction, elect directors, and approve important corporate decisions.
• No Fixed Dividend Rate : Unlike preference shares, equity shares do not have a fixed dividend rate. Dividends are discretionary and contingent on profitability and other financial factors.
• No Redemption Date : Equity shares do not have a predetermined redemption or maturity date. They remain outstanding as long as the company exists or until repurchased or sold by the shareholder.
• Risk and Reward : Equity shareholders bear the highest risk among all shareholders. They can benefit from the company's success and growth through capital appreciation and dividends but also face the risk of financial loss if the company's performance declines.
• Capital Appreciation : Common shares offer potential capital appreciation, meaning the value of the shares can increase over time as the company's earnings and assets grow. This capital gain is a key source of returns for equity shareholders.
• Transferability : Equity shares are usually freely transferable, allowing shareholders to sell them to other investors in the secondary market, subject to regulatory restrictions and company bylaws.

• Common Shares : The most basic form of equity ownership in a company. Common shareholders have voting rights in corporate matters and the right to receive discretionary dividends based on the company's profitability.
• Preferred Shares : Often considered a separate class, preferred shares have characteristics of both equity and debt securities. They usually do not confer voting rights but have a fixed dividend rate and priority over common shares in receiving dividends and assets in case of liquidation.
• Founder's Shares : Issued to the founders or early investors, these shares may come with special rights or privileges, such as enhanced voting rights or priority in dividend payments. They are often used to retain control of the company.
• Class A Shares : Typically have full voting rights and are available to the general public for trading on stock exchanges.
• Class B Shares May have different voting rights or dividend preferences compared to Class A shares. They are often held by company insiders and may have restrictions on transferability or voting rights.
• Restricted Shares : These shares come with certain restrictions on transferability or sale and are often used as compensation for employees or executives.
• Treasury Shares : Repurchased by the issuing company and held in its treasury. These shares do not have voting rights or receive dividends but can be reissued or cancelled by the company at a later date.

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