What are Shares? Its Types Explained!

Shares are a unit of ownership in a company. Several units of shares get issued at a specific face value cumulatively called share capital. This is the amount that a company limited by liability raises by selling shares to investors to fund its projects or business. The word share is generally assumed as Equity. However, there are other types of shares too in the Stock Market:

Ordinary shares

Also called common stock or Equity shares, it is the most popular type issued by a company, and it reflects the company ownership. Ordinary shares have some entitlements like voting rights unavailable to other types. Each share carries one voting right. They also enjoy dividends but only after the preference shares dividend gets paid. Also, if the company gets wound up, Equity shareholders rank last to any residual proceeds. 

However, the liability is limited to their holdings. This means the maximum loss accruing to a shareholder is their amount in the capital.

Differential Voting Rights

Referred to DVRs are Equity shares that carry differential rights concerning voting and dividends. The dividends paid are also higher for ordinary shareholders. The DVRs generally trade at a discount to common shares. The voting right is also fractional to the Equity shares. The dividend yield is attractive sometimes. In the year 2000, the companies act 1956 was amended to allow the issue of DVRs. 

Indian companies were not fancy DVRs until 2008 when Tata Motors listed the first-ever DVR on the Indian bourses. Later, many followed Jain Irrigation, Gujarat NRE Coke, and Future Enterprises. However, Gujarat NRE Coke has been under liquidation since 2018 and is run by the liquidator. 

Share Warrants

These are documents issued under the company’s common seal that entitles the bearer of the company with the shares specified in it. These are negotiable instruments transferable by mere delivery. Share warrants are like a call option that gets issued for a premium to get converted into Equity in the future. Warrants are a good source of attracting investors as the price is low and the investor shows immediate commitment. 

On conversion, Equity shares get issued. If not converted, the premium gets forfeited.DLF had issued warrants in 2020, which have since been converted into Equity shares. ESOP is a warrant type but is given only to the employee, and no upfront premium gets collected by the company. Share warrants are part of the Equity capital and are shown under them on the balance sheet.

Preference Share Capital

It is a capital issue that gives preferential rights as to dividends compared to Equity shares. A fixed dividend rate gets declared every year until the redemption of preference shares. Preference shareholders do not have voting rights. As for the insolvency of a company, preference shareholders get paid before the Equity shareholders. Preference shares have many variations. 

Cumulative Preference Shares:

If dividends are not paid in any year, they get treated as arrears and paid later.

Non-Cumulative Shares:

It is the exact opposite of cumulative preference shares. If the dividend is missed, the company is not obligated to pay it as an arrear.

Convertible Preference Shares:

These types are convertible into Equity shares at a fixed rate in the future. 

Non-convertible Preference Shares:

These are not convertible into Equity shares and are redeemed when matured.

Participating and Non-participating:

Participating types enjoy the right to participate in future profits if it crosses a benchmark, while the non-participating ones want only the fixed dividend rate.

By and large, Equity share is the most favored capital form than any other type in the Share Market today. DVRs are yet to evolve. SEBI also released a consultation paper on DVRs on March 20, 2019, highlighting the benefits and needs to support India’s high growth phase.

Olivia Reeve

Olivia has been working in the field of finance for the last 15 years and has recently gained interest in the Bitcoin and Cryptocurrency market. She can talk about anything that involves numbers and is currently working on her Finance & Investment blogs.

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