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What are Shares and What are the Various Types of Shares?

ICICI Securities 24 Feb 2022 0 COMMENT

Introduction

Shares as a mechanism of ownership in companies and ventures have their origin in the Roman Empire. During this period, citizens of the empire would form joint ventures with the authority's support for various projects. Each participant would pay a particular portion of the project's cost in return for revenues when successful. Stock as a mechanism was further developed in England in the centuries following the Norman invasion. Stora Enso, a packaging company, was the first to issue a stock certificate in recorded history. Stocks began to gain prominence with stocks by the Dutch East Indies Company in the early 17th century, soon followed by the other East Indies companies. With the London Stock Exchange establishment in the late 18th century, shares in trading were cemented.

What are shares?

Shares represent units of ownership in a company, i.e., they represent the percentage of profits a company garners that an individual investor has the right to. Shares also represent rights and obligations that are associated with the partial ownership of a company. These may include voting rights, obligation to exercise control over the functioning of the company etc.

Additional read: How to Buy & Sell Shares in Demat Account

Types of shares

Now that we know the meaning of shares, we can discuss the types of shares. The two different types of shares are equity or common shares and preference shares. Both equity shares and preference shares can be further classified into subcategories.

  • Equity shares form the majority of shares issued by a company. These are transferable and actively traded in the share market. Holders of equity shares are exposed to the total risk as equity shares are affected by market fluctuations.
  • Equity shares can be classified into voting and non-voting, bonus, sweat, and rights shares. Voting shares provide voting rights to the shareholder in a general meeting. Bonus shares are free shares and are also called a stock dividends. Sweat equity shares are shares gifted to employees of a company who have shown exceptional dedication. Rights shares are new shares offered to shareholders at a specific price for a particular time before the shares in question are opened for trading in the stock market.
  • Equity shares can also be classified into dividends shares, value shares and growth shares. Dividend shares refer to shares that are issued as dividends payments by companies. Growth shares refer to shares whose values increase rapidly, providing capital gains to investors. Value shares are shares that are traded at rates lower than their intrinsic value. These shares generally rise in price over time.
  • Preference shares are the shares whose dividends are paid to the shareholders before the payment of common stockholders. These include Cumulative/Non-cumulative, Participating/Non-Participating, Convertible/Non-Convertible, and Redeemable/Non-redeemable shares.
  • Cumulative preference shares are shares whose benefits accumulate from one year to the next if not declared by the company. Non-cumulative preference shares are the opposite, with benefits expiring every year.
  • Participating shares are shares that entitle shareholders to receive any additional profits after the payment of dividends. Non participating shares have no additional benefits other than regular dividends payments.
  • Convertible shares can be converted into equity shares, while non-convertible shares cannot be converted.
  • Redeemable shares can be purchased back by companies for a fixed price and time. Non-redeemable shares do not come with such conditions.

Conclusion

To understand what shares are, investors need to learn of the different types of shares which exist. Each of these types of shares has its benefits and drawbacks, which can be combined to meet the requirements and goals of any number of investors.

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.