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Kinds Of Shares

Krati Rajoria

What are SHARES?


Definitions:
Sec 2(84) of THE COMPANIES ACT,2013:
A share is a share in the share capital of a Company.
Boreland Trustees v/s Steel Bros. & Co. Ltd.:
A share represents the interest of a share holder in the capital of the
Company & this interest is measured by the number of shares he is
holding & the amount paid by him to the Company on shares.
Thus, the amount of capital to be raised by a Company is always
divided into small parts or units of equal value & these units are
called SHARES

Kinds Of Shares :
The different kinds of shares which can be raised by
Companies are :
EQUITY SHARES
PREFERENCE SHARES
DEFERRED SHARES

Equity Shares :
The equity shares or ordinary shares are those shares on which the
dividend is paid after the dividend on fixed rate has been paid on
preference shares.

Characteristics:
No fixed rate of dividend.
Dividend is paid after dividend at a fixed rate is paid on preference
shares.
At the time of liquidation, capital on equity is paid after preference
shares have been paid back in full.
Equity shareholders have voting rights & thus, control the working of
the Company.
Equity shareholders are the virtual owners of the Company.

Preference shares :
Preference shares are those shares which carry with them preferential
rights for their holders, i.e, preferential right as to fixed rate of dividend &
as to repayment of capital at the time of winding up of the Company.

Characteristics :
Fixed rate of dividend.
Priority as to payment of dividend.
Preference as to repayment of capital during liquidation of the Company.
Generally preference shareholders do not have voting rights.

Kinds of Preference
On the basis of cumulation
of dividend :
Shares
:

Cumulative Preference Shares:


They are those shares on which the dividend at a fixed rate goes on
cumulating till it is all paid.
Non Cumulative Preference Shares:
These are those shares on which the dividend does not cumulate.
On the basis of participation :
Participating Preference shares:
This type of shares are allowed to participate in surplus profits during the
lifetime of the company & surplus assets during winding up.(Preference
shares which, in addition to paying a specified dividend, entitle preference
shareholders to participate in receiving an additional dividend if ordinary
shareholders are paid a dividend above a stated amount.)
Non Participating Shares:
These shares are not entitled to participate in surplus profit. Dividend at
fixed rate is given.

Kinds of preference
shares :
On the basis of conversion :
Convertible preference shares:
The owners of these shares have the option to convert their
preference shares into equity shares as per the terms of issue.
Non-convertible preference shares:
The owners of these shares do not have any right of converting their
shares into equity shares.

On the basis of redemption:


Redeemable preference shares:
These are to be purchased back by the company after a certain
period as per the terms of issue.
Irredeemable preference shares:
These are not to be purchased back by the company during its
lifetime.

Status of Preference
Shares, if Articles of
Association are silent :
Preference shares will be presumed to be:
Cumulative
Non-Participating
Irredeemable and
Non-Convertible.

Deferred Shares :
Deferred shares are those shares on which the payment of dividend and
capital (at the time of winding up of a company) is made after money is
paid in full on preference shares and equity shares.
Characteristics:
Rate of dividend is not fixed. It depends upon the availability of profits
& the discretion of the Board of the Directors.
Dividend is paid after payment of dividend on equity & preference
shares.
At the time of liquidation, capital on these shares is returned after
capital is repaid on both preference & equity shares.

When you buy shares, you do not invest in


the stock market. You invest in the equity
shares of a company. That makes you a
shareholder or part-owner in the company.
since you own part of the assets of the
company, you are entitled to a share in the
profits these assets generate.
If you sell the shares for more, the profit
you make is called capital appreciation.

You could also make money with dividends. Usually, a company distributes a
part of the profit it earns as dividend.
For example: A company may have earned a profit of Rs 1 crore in 2003-04. It
keeps half that amount within itself. This will be utilised to buy new
machinery or more raw material or to reduce its loan with the bank. It
distributes the other half as dividend.
Assume the capital of this company is divided into 10,000 shares. That would
mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by
10,000 shares; each share would earn Rs 500. The dividend in this case
would be Rs 500 per share. If you own 100 shares of the company, you will
get a dividend cheque of Rs 50,000 (100 shares x Rs 500).
Sometimes, the dividend is given as a percentage -- i e the company says it
has declared a dividend of 50%. It is important to remember this dividend is a
percentage of the share's face value (the original value of each share). This
means, if the face value of your share is Rs 10, a 50% dividend will mean a
dividend of Rs 5 per share.
However, chances are you would not have paid Rs 10 (the face value) for the
share.

Let's say you paid Rs 100 (the then market value). Yet,
you will only get Rs 5 as your dividend for every share
you own. This, in percentage terms, means you got just
5% as your dividend and not the 50% the company
announced.
Or, let's say you paid Rs 9 (the then market value). You
will still get Rs 5 per share as dividend. In percentage
terms, this means you got 55.55% as dividend yield and
not the 50% the company announced.

What's good about preference


shares

1. You are assured of a dividend


If you own ordinary shares, you are not automatically entitled to a dividend
every year.
The dividend will be paid only if the company makes a profit and declares a
dividend.
This is not the case with preference shares. A preference shareholder is
entitled to a dividend every year.
What happens if the company doesn't have the money to pay dividends
on preference shares in a particular year?
The dividend is then added to the next year's dividend. If the company can't
pay it the next year as well, the dividend keeps getting added until the
company can pay.
These are known as cumulative preference shares.
Some preference shares are non-cumulative -- if the company can't pay the
dividend for one particular year, the dividend for that year lapses.

2. They get priority over ordinary shares


Ordinary shareholders get a dividend only after the
cumulative preference shareholders get theirs.
Preference shareholders are given a preference over the
rest. That's why it is called a preference share.
3. Preference shares are safer
In case the company is wound up and its assets (land,
buildings, offices, machinery, furniture, etc) are being
sold, the money that comes from this sale is given to the
shareholders. After all, shareholders invest in a business
and own a portion of it.
Preference shareholders' get the money first. Their
accounts are settled before that of the ordinary
shareholders, who are the last to get paid.

What's not good about


preference shares

1. They are not easily available


Usually, preference shares are most commonly issued by companies to institutions.
That means, it is out of the reach of the retail investor.
For example, banks and financial institutions may want to invest in a company but
do not want to bother with the hassles of fluctuating share prices.
In that case, they would prefer to invest in a company's preference shares.
Companies, on the other hand, may need money but are unwilling to take a loan. So
they will issue preference shares. The banks and financial institutions will buy the
shares and the company gets the money it needs.
This will appear in the company's balance sheet as 'capital' and not as debt (which
is what would have happened if they had taken a loan).

2. They are not traded on the stock exchange


The big disadvantage of preference shares, of course, is the
fact that they aren't traded on the markets.
This means they are not 'liquid' assets; there's little scope for
the price of these shares to move up or down.
On the other hand, ordinary or equity shares are traded in the
markets and their prices go up and down depending on supply
and demand for the stock.
But, that does not mean the investor is stuck with his shares.
After a fixed period, a preference shareholder can sell his/ her
preference shares back to the company.
You can't do that with ordinary shares. You will have to sell
your shares to any other buyer in the stock market. You can
only sell your shares back to the company if the company
announces a buyback offer.

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