Definition: Shares implies stake in the company’s capital, which also comprises of stock excluding where a difference among stock and share is disclosed or hidden. Shares are the smallest unit of the company’s capital, and the holder of such stocks are known as shareholders (the owners of the company).
- Kinds of shares
- Features of shares
- Difference between Preference shares and Equity Shares
- Advantages of shares
- Disadvantages of shares
Kinds of shares
Both private and public companies can issue only two types of shares in the market for capital generation. The following are the two kinds of shares:
Preference shares by its name define that they get the claims before ordinary or equity shareholders. At the time of dividend distribution, they get a dividend in priority, and even in case of liquidation of the company preference shareholders have the first right in the amount of capital repayment.
Preference shares are of various types; they are as follows:
- Cumulative preference shares: Preference shares usually brings a right to a definite rate of dividend out of the returns of the company. This interest may endure from year to year; subsequently, if any overdue dividend in one year is considered as arrear and the same is endured to the next as it is and in consecutive years, then it is assigned as a cumulative preference share.
- Non-cumulative preference shares: Instance with non- cumulative preference shares, stakeholders are authorized to claim dividends only if the company acquires sufficient returns. If in any of the years, the company does not acquire adequate profit, the dividend for such year will not be paid to its shareholders, and the benefits of that year’s dividend will be eliminated. This kind of shares is termed as a non-cumulative preference share.
- Participating preference shares: Occasionally, the preference shareholder has accustomed a right to the second dividend; these shares are known as participating preference shares.
- Non-participating preference shares: In these shares, stakeholders don’t have any right of the second dividend or share in the surplus profits of the company. They don’t have the right to claim an asset in case of winding up of the company.
- Convertible preference shares: A alteration benefit may be used as an allure to investors. The convertible preference shareholder has a right to convert their preference share into equity shares during a specified period of time.
- Non-convertible preference shares: The preference share, which cannot be converted into equity shares at any point, are termed as non-convertible shares.
- Redeemable preference shares: The immunity for the company to redeem may also emphasize the preference shares issue. Correspondingly, the preference share, which can be reclaimed after a stated period or at the attention of the company, are termed as redeemable preference share.
- Irredeemable preference shares: The shares which cannot be reclaimed or redeemed during the life span of the company are known as irredeemable preference share.
Equity shares are one of the most significant causes of long-term financing. They are also known as owner’s equity or ordinary share. The stakeholders of such shares are the absolute owner of the company.
But these shareholders get the dividend paid only after the payment of the dividends to the preference shareholders.
Features of shares
- Prior claims: At the time of dividend distribution or in case of liquidation of the company, preference shareholders have a prior right to claim on the company’s asset and dividend’s sum.
- Fixed rate of dividend: The rate of dividends accustomed to the preference shareholder is fixed; thus, they have less hazardous than equity share. However, the participating preference shareholder enjoys a fixed dividend and also participate simultaneously with the equity shareholder in the extra dividend, if any.
- Conversion to Equity share: Few preference shares are of convertible nature, i.e., they can convert into equity share within a stated duration of an agreement. These shareholders convert their preference share into equity share to raise their wealth.
- No voting rights: In general, preference shareholder doesn’t have any voting rights in the events of the company. However, in exceptional circumstances such as the verdict regarding the liquidation of the company, devaluation, reimbursement of share capital, they also can vote.
- Enduring Capital base: These shares represent the company’s long-lasting capital base, i.e., the sum returned to the stakeholders only after the liquidation of the company.
Yet it is not sure what sum will stakeholders get at such time. Indeed, the stakeholders will get their share of profit only if all the claims have settled.
- No precise dividend: The sum of dividend on equity shares are not fixed in so far as it is the balance amount left after the holding of income and disbursement of dividend to the preference shareholders.
Furthermore, the equity shareholders cannot pressurize the company to grant them dividends despite sufficient earnings. The company has full wisdom over this affair.
- Polling rights: Being an owner of the company, the equity shareholders have the full right to make a vote in the company’s matters. An equity shareholder acquires one vote for each share they hold.
If the shareholder is not capable of attending the company’s general meeting, he/she can appoint a proxy on his behalf to participate in the meeting.
- Principle for enhancing borrowed capital: With accustomed leverage ratio, further borrowed capital can be lifted with a hike in the equity share capital. It implies that these shares design the fundamental for enhancing debts.
- Public circulation or private arrangement: Equity shares are depleted to the public over a prospectus advertised in the newspaper. Generally, a new company issue its share at par and a company having a goodwill in the market may issue its share at a premium or on discount.
Difference between Preference shares and Equity Shares
|Basis of difference||Preference shares||Equity shares|
|Rights to proceeds||Preference stakeholders are authorized to reap the defined rate of dividend before the equity shareholders.||The equity venture capitalist has an enduring claim to the earning if there is an excess profit.|
|Liquidation rights||Preference shareholders have exceptional rights of restoration of capital before equity shareholders in case of liquidation of the company.||Equity shares have a leftover claim over the assets of the company in case of liquidation.|
|Polling rights||Generally, they do not have polling rights, but in some situations like liquidation decisions, they also can vote.||Equity shareholders are the owner of the company and thus enjoys normal voting rights.|
|Controlling rights||Preference shareholders do not have any right to control the events of the company.||Equity shareholders have the full rights to control the matters of the company.|
|Redeeemability||Preference shares can be redeemed at the end of the specified period mentioned in the agreement.||Equity shares establish the perpetual share capital of the company and thus cannot be redeemed during the life of the company.|
|Risk Factor||Preference shares comprise small risk; their rights are safe and sheltered.||Equity share capital comprises of more financial risk than preference shares.|
Advantages of shares
- Preference shares
- The company organizes long-term capital means of issuing preference shares beyond any charge or debt on its assets.
- Preference shareholders are authorized for the fixed rate of dividends; thus, these are advisable to those shareholders who don’t want to take the risk.
- In comparison with equity shares, preference shares are less costly.
- Generally, preference shares do not offer voting rights; thus, there will be no dilution of control.
- Preference share capital is a unit of net worth, and it is feasible to enhance the capital structuring of the company.
- Equity shares
- It does not induce any economic afflict on the resources of the company.
- It is a mode of enduring long-term capital; thus, repayment liability does not arise.
- The company can assemble long-term capital by virtue of equity shares beyond any modification on the assets of the company.
- Equity share capital enlarges the esteem benefits of the company.
Disadvantages of shares
- Preference shares
- The outstanding dividend to be paid on cumulative preference shares increases trouble for the company.
- Since preference dividend is not authorized for tax deduction benefit, this will lead to a rise in the cost of capital in correlation with alternative sources of finance.
- If at the time of depression, the company redeems the preference shares, the preference shareholders will suffer the losses.
- Equity shares
- Adversity in exchange on equity endures as the unified capital structure, repressed of the equity shares.
- Authority issues may lead to the absorption of the conduct of the company in the hands of a few persons.
- High rates of dividends on equity shares at the time of boom in the market outcomes a recognition of the price of the shares, which leads to an abundant plunge.
Shares are unit of takeover interest in an enterprise or financial asset that grants an equal sharing in surplus if any, is announced in the mode of dividends. The shares are generally divided into two types, i.e., preference shares and equity shares.