You’re at a party, and you overhear people talking about the share market. They’re discussing IPOs, shares, and something called delisting. You’re intrigued but feel a bit lost.
Well, don’t worry! We’re here to break down the world of shares for you in a simple way.
So, buckle up and let’s talk about shares and their types!
What are Shares?
Think of a share as a slice of a company’s pie. When you buy a share, you’re essentially buying a piece of that company.
This makes you a shareholder, and as a shareholder, you’re entitled to a portion of the company’s profits, which are often paid out as dividends.
However, if the company faces losses, you share those too. In simple terms, owning a share means you own a small part of the company proportional to the number of shares you’ve bought.
Shares are generally divided into two main types: Equity shares and Preference shares. Each type has its own set of characteristics and benefits.
What are Equity Shares?
Also known as ordinary shares, equity shares make up the majority of the shares issued by a company.
As an equity shareholder, you have voting rights in the company and the right to receive dividends. However, these dividends are not fixed and depend on the company’s profits.
What are the types of Equity shares?
Equity shares can be further classified based as:
Additional shares issued to existing shareholders for free.
New shares offered to existing shareholders before being offered to the public.
Sweat Equity Shares:
Shares issued to employees in recognition of their contributions to the company.
Voting And Non-Voting Shares:
Most ordinary shares carry voting rights, but some may have differential or zero voting rights. Shares with differential or zero voting rights generally trade at a price lower than the ordinary shares.
What are Preference Shares?
Preference shares, also known as preferred stocks, are a type of share that gives holders certain rights and privileges not granted to holders of ordinary shares. These rights often include:
Preference shareholders have the right to receive dividends before common shareholders. The dividends are usually fixed and are paid out regularly, providing a steady income stream for the shareholders.
In the event of the company’s liquidation, preference shareholders have a higher claim on the company’s assets and earnings. They will be paid before common shareholders but after debt holders.
Some preference shares have the option to be converted into a certain number of common shares.
The company has the right to buy back/repurchase preference shares at a predetermined price.
However, preference shares typically do not carry voting rights, meaning holders may not have a say in the company’s operations or governance. This lack of control is a trade-off for the increased income and security preference shares offer.
What are the types of Preference shares?
There are different types of preference shares each with its own set of characteristics and benefits.
Here are the different types of preference shares for your reference:
1. Cumulative And Non-Cumulative Preference Shares:
Cumulative preference shares allow shareholders to carry forward their dividends to the next financial year if the company doesn’t declare an annual dividend. Non-cumulative preference shares don’t provide this benefit.
2. Participating/Non-Participating Preference Share:
Participating preference shares allow shareholders to receive surplus profits, in addition to regular dividends. Non-participating preference shares only provide regular dividends.
3. Convertible/Non-Convertible Preference Shares:
Convertible preference shares can be converted into equity shares, while non-convertible preference shares can’t be converted.
4. Redeemable/Irredeemable Preference Share:
Redeemable preference shares can be repurchased by the company at a fixed price and time. Irredeemable preference shares don’t have this option.
Investing in shares can be a great way to generate long-term wealth and achieve your financial goals.
It allows you to invest in a variety of sectors and industries, helping you diversify your portfolio and manage your risks.
Remember, it’s important to choose a reliable financial partner to open your Demat and trading account.