All You Need to Know About Shares
All You Need to Know About Shares and Their Types
Before we delve deeper into the concepts of what is share? Let’s understand the meaning of shares. The financial ownership of companies is depicted in the form of shareholding. The corpus of funds put together by the promoters are divided into small units, known as shares. Each share would have a face value. This could vary from Re 1, to Rs 2, Rs 5, Rs 10, Rs 100 or higher. These shares are allotted to shareholders in the ratio of the funds they invest in the company. In return, the shareholders are entitled to receive dividends from the company. Dividends are a part of the profits made by the company. There is however, a flip side too, to owning the shares of a company. In bad years when the company doesn’t make a profit, shareholders are not given any dividend. In the worst case scenario, if things go extremely bad for the company, and it gets liquidated, the shareholders stand to lose most or all of their invested amount.
In the event the company prospers and the promoters wish to expand the business, they could mop up funds from the general public through an Initial Public Offering (IPO). Here, the shares of the company are listed on one or more stock exchange(s) and the shares are traded online. These are known as publically-traded shares.
Now you have understood the meaning of shares, lets look at its types.
Types of Shares
There are mainly two types of shares. These are:
The majority of shares that companies issue are commonly referred to as ordinary shares. Equity shares are transferable and are actively traded on stock exchanges by investors. Investors also get the right to vote on matters affecting the company, besides being entitled to receive dividend payouts. However, these payouts are not regular or fixed. Equity investors also share in any losses incurred by the business up to the value they invested. Equity shares may be divided according to:
- Share Capital
- Preference Share
In comparison to holders of common shares, preferential or preferred shareholders are given preference in receiving a company's profits. Additionally, preferred shareholders are compensated before common shareholders in the event of a company's insolvency. The different types of shares that fall under this category are as follows:
Cumulative and Non-Cumulative
If a company does not distribute an annual dividend, the benefits of cumulative preference shares get carried forward to the next fiscal year. Holders of non-cumulative preference shares however, do not get this advantage.
Participating vs. Non-Participating
After the company pays dividends to its shareholders, stockholders who own preference shares become eligible to obtain surplus earnings. This is in addition to receiving dividends. There are no such benefits associated with non-participating preference shares.
For an individual investor, investing in shares can prove to be a terrific way to generate long-term wealth. You may increase the chances of creating wealth and lower your risks by investing in stocks of companies from different sectors and businesses. As for opening your Demat and trading accounts, make sure to choose only reputable and trustworthy companies.