There are various types of securities traded on the stock markets. Stocks are the most popular investment destination among them. Many people prefer stocks as their primary investments in stock marketing in India. Investors like to invest in shares of fundamentally strong companies. Investors profit from increase in share prices and dividends. However, it is important to note that there are different types of shares. All shares do not have the same set of characteristics. The kind of benefits they provide also differ greatly. We shall look at all the four major types of shares. But first, let’s begin by understanding the meaning of shares.
What are Shares?
How do we define shares: A share of a company or stock represents a single unit of equity ownership. When companies wish to accumulate funds they issue shares. The promoters or owners sell some of their stake in the company. The percentage of ownership is divided by the total number of shares issued. In this way we get the percentage of ownership provided by a single share. Investors get partial ownership in a company in proportion to the shares they hold. So, higher the number of shares you possess, higher will be your stake in the company. An investor can hold a share for any amount of time. Except in some extraordinary conditions, investors can hold shares as long as they want.
The investors profit when the price of a share increases. In addition, shareholders also get the right to dividends. This means that they should get a portion of the profits earned by the company in a financial year. Some shares also entitle shareholders to voting rights in a company. So, investors can have a say in its decision making.
Types of Shares
We can identify shares on the basis of different parameters. They can be classified into different types based on the rights they give, market capitalisation or returns. However, shares are commonly divided into the following four categories. Each of them come with different ownership rights, conditions and return potential. Here’s a detailed description for you.
Ordinary shares
Ordinary shares are probably the most common ones. They provide the right to a single vote per share. Ordinary shares entitle the shareholders to obtain dividends from the company. They get a share in the earnings of the company. So, investors tend to benefit if the company is doing well. Investors receive dividends in proportion to the shares they hold. On the other hand, the shareholders shall incur losses if the company is not earning profits, as the company’s share price may tumble. The extent of losses depends on the number of shares an investor holds. If an organisation shuts down, the proceeds are again distributed proportionally. However, in such events ordinary shares are ranked after preference shares. This means that investors with preference shares are given more priority.
Preference shares
Preference shares give the owner the right to receive a fixed amount of dividends every year. Also, for dividend distribution owners of preferred shares get higher priority than investors of ordinary shares. Preference shares also carry preferential treatments with regards to capital reimbursement if the company closes down. The shareholders having preference shares get the highest priority to get their capital. The dividends are generally as a percentage of the nominal value. It is the value of the shares when they were issued.
Non-voting shares
Non-voting shares usually do not provide the right to vote or attend company’s meetings. These shares are given to employees. The objective is to pay their remuneration in the form of dividends. This method is adopted for increasing tax efficiency for both the employer and the employee.
Redeemable shares
Companies issue redeemable shares with the condition that they will buy back these shares in future. It is generally applied in case of non-voting shares provided to employees. If an employee leaves, his shares will be taken back at the nominal price.
ConclusionShares provide partial ownership in companies. There are basically four types of shares – ordinary, preference, voting and redeemable. While ordinary shares give voting rights, preference shares are given priority in capital reimbursement. Non-voting shares given mainly to employees are good for tax purposes. Redeemable shares are also issued to employees with a promise to take them back in future. So, we can say all four types of shares have varied properties. However, all of them can be traded with a single trading account. Firms like Share India offer next-gen trading solutions on its best stock market app. So, open your trading account with Share India and start investing in shares of your choice.
