There are two main types of shares – ordinary equity shares and preference shares. Today, we will discuss each type and understand all the sub-types these two shares have.

What are the Types of Shares?

1. Ordinary Equity Shares

Ordinary equity shares are the most common types of shares that companies issue. When you have this type of share of any company, you hold a significant portion of the company’s ownership. Here’s where you get certain rights of the company, such as:

• Voting rights
• Ownership rights
• Dividends
• Participation in the election of the board of directors

2. Preference Shares

Preference shares, as the name suggests, are a type of share that has preferential rights. Owners of preference shares are given preference over ordinary equity shareholders. This preference includes preference over receiving repayments during company liquidation and getting dividends.

Types of Ordinary Equity Shares

●     Types of equity shares based on share capital

1. Authorised Share Capital

As per the company’s Memorandum of Association (MOA), a company has a certain capital limit it can issue to its shareholders. This is known as authorised share capital.

2. Issued Share Capital

Issued share capital refers to the portion of a company’s capital that has been allotted to shareholders. This capital is issued against a certain investment made by the shareholder.

3. Subscribed Share Capital

Subscribed share capital is a company’s capital that investors have subscribed for. It shows the shareholder’s commitment to purchase the shares.

4. Paid-Up Capital

The paid-up capital is the money that the investor pays for holding the company’s stock with them.

●     Types of equity shares based on definition

1. Right Shares

Right shares are the types of shares that the company issues to its existing shareholders before offering them to the public or external investors. These are often known as unlisted shares or you may have even heard the term pre-IPO shares used for them.

2. Voting and Non-Voting Shares

Voting shares are types of shares in a company that grant the shareholder the right to vote on important matters, such as electing directors or approving mergers. Although the majority of ordinary equity shares come with voting rights, sometimes a company can issue zero voting or differential rights to their shareholders, where the shareholders do not have a say in the strategic decisions of the company.

3. Sweat Equity Shares

As an employee of the company, if you have made a significant contribution to the company’s success, you are offered sweat equity shares without having to make any investment.

4. Bonus Shares

The bonus shares are the types of equity shares that are additionally offered to existing shareholders without any costs, as a bonus.

Types of Preference Shares

1. Redeemable and Irredeemable Preference Shares

Redeemable preference shares are a type of preference share that gives the issuing company the option to buy back the shares, under specific conditions. On the other hand, irredeemable preference shares cannot be redeemed by the company. Once issued, they remain outstanding until the company is liquidated.

2. Convertible and Non-Convertible Preference Shares

Convertible preference shares can be converted into equity shares at the shareholder’s discretion if the conditions in the Articles of Association (AoA) are met. While non-convertible preference shares are types of shares that cannot be converted into equity shares at any point.

3. Participating and Non-Participating Preference Shares

Participating preference shares allow shareholders to receive additional dividends beyond the fixed rate after the ordinary shareholders have received their dividends. Non-participating preference shares offer a fixed dividend and do not allow shareholders to participate in any extra profits or surplus.

4. Cumulative and Non-Cumulative Preference Shares

Cumulative preference shares are a type of preference share where, if the company fails to pay the dividend in a given year, the unpaid dividends accumulate and must be paid out in future years before any dividends can be distributed to ordinary shareholders. Non-cumulative preference shares do not allow the accumulation of unpaid dividends. If the company fails to pay dividends in a particular year, those dividends are forfeited, and the shareholders are not entitled to receive them.

Conclusion

Investing in shares is a long-term wealth generation strategy. Hence, to gain maximum profits, make sure you understand the pros and cons of each share type and then invest carefully in those that suit your preferences.