Types of Shares in Companies, Equity, Preference, & More Explained

In the corporate world, companies raise capital by issuing shares to investors. Shares represent a unit of ownership in a company, providing shareholders with specific rights and benefits. Understanding the different types of shares is essential for investors and students of commerce to make informed decisions. This blog explores the primary types of shares issued by companies and their unique features.

What Are Shares?

A share represents ownership in a company. When a person purchases shares, they become a shareholder and gain a set of rights such as the ability to vote in company meetings, receive dividends, and participate in key decisions. Shares are issued by companies to raise capital for purposes such as expansion, modernization, or operational improvements.

Broadly, shares are classified into two main types:

• Equity Shares
• Preference Shares

Beyond these, there are specialized categories such as bonus shares, rights shares, sweat equity shares, and others. Let's explore each in detail.

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Types of Shares

Below, we've mentioned types of Shares:

1. Equity Shares

Equity shares, also referred to as ordinary shares, form the backbone of a company’s capital structure. Holders of equity shares are the actual owners of the company and have voting rights. They are eligible for dividends, although the amount is not fixed and depends on the profitability of the company.

Features of Equity Shares:

• Ownership Rights: Equity shareholders hold ownership in the company.

• Voting Rights: They can vote in general meetings, including director elections.

• Variable Dividends: Dividends are declared based on the company’s financial performance.

• High Risk and Return: Equity holders bear more risk, but they may benefit from capital appreciation.

Subcategories of Equity Shares:

• With Voting Rights: These allow participation in important decisions.

• Without Voting Rights: Some shares may lack voting rights but might offer better dividend terms to compensate.

2. Preference Shares

Preference shares give shareholders preferential treatment over equity shareholders, especially concerning dividend payouts and repayment during company liquidation.

Features of Preference Shares:

Fixed Dividend: Dividends are paid at a fixed rate before equity shareholders receive anything.

Repayment Priority: Preference shareholders are prioritised in the event of a company winding up.

Limited or No Voting Rights: These shareholders usually do not participate in voting.

Types of Preference Shares:

Cumulative Preference Shares: Accumulated unpaid dividends are carried forward to future years.

Non-Cumulative Preference Shares: No right to claim unpaid dividends in subsequent years.

Convertible Preference Shares: Can be converted into equity shares after a specific period.

Non-Convertible Preference Shares: Cannot be converted into any other form of shares.

Redeemable Preference Shares: Can be repurchased by the company after a fixed term.

Irredeemable Preference Shares: These remain active until the company is dissolved.

3. Bonus Shares

Bonus shares are issued to existing shareholders free of cost, as a form of reward or capital reorganisation. These shares are distributed proportionally, increasing the total number of outstanding shares without requiring additional capital investment from the shareholders.

Features of Bonus Shares:

• Issued without any payment from the shareholder.

• Increase the number of outstanding shares.

• Help improve investor sentiment and reflect retained profits.

4. Rights Shares

Rights shares are offered to existing shareholders to raise additional funds. Shareholders receive the right to buy additional shares at a price lower than the market rate, usually within a specific time window.

Features of Rights Shares:

• Offered at a concessional price.

• Maintain existing shareholders' proportional ownership.

• Allow companies to raise capital without going to the public market.

5. Sweat Equity Shares

Sweat equity shares are issued to employees or directors for their contribution in terms of intellectual property, know-how, or value addition.

Features of Sweat Equity Shares:

• Issued at a discount or in exchange for non-cash consideration.

• Help retain valuable employees and reward key contributions.

• Are usually subject to a lock-in period.

6. Employee Stock Option Plans (ESOPs)

ESOPs are share-based incentive schemes under which employees get the option to purchase company shares at a predetermined price, often after a specific period.

Features of ESOPs:

• Encourage employee participation in company ownership.

• Help in retaining skilled employees.

• Options are exercisable after a vesting period and may lead to actual shareholding.

7. Deferred Shares

Deferred shares, also known as founders' shares, are generally issued to promoters and early-stage investors. These shares come with certain restrictions but also the potential for higher returns over time.

Features of Deferred Shares:

• Dividend is paid only after other shareholders have received theirs.

• Typically held by company promoters or founders.

• Often used to retain long-term control over the business.

Importance of Understanding Different Types of Shares

Understanding the structure and characteristics of various shares is vital for:

• Making informed investment decisions.

• Evaluating dividend income potential.

• Assessing risk profiles of different share classes.

• Participating in corporate decisions and governance.

While equity shares are more volatile and associated with long-term gains, preference shares offer fixed income with relatively lower risk. Bonus and rights shares, on the other hand, reflect corporate strategies to strengthen shareholder relations or infuse capital.

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