What are Shares and Types of Shares?

According to the Companies Act of 2013, a share is a shareholder’s interest in a company’s assets, while shares also mean an owner’s portion in a company.

Public limited corporations can use stock offerings to raise money for their operations. These shares come with a number of other privileges in addition to ownership rights. Certain share classes grant the ability to vote, priority dividend rights, access to the company’s excess earnings, a portion of the company’s losses, and other benefits. In this blog, we’ll look into what are shares, shares meaning and types, why one should invest, and more.

To invest in shares, one must open a Demat account, and to trade on the exchange through the broker’s platform, one must open a trading account. The investor’s bank account must be linkable to both the Demat account and the trading account, and the Demat account and trading account must have the same address.

Key Highlights

• Investors who trade capital for shares of a corporation or other financial assets own ownership units in these entities.

• Common stock shares make voting rights and potential rewards possible through price growth and dividends.

• Although preferred stock shares don’t increase in value, they can be redeemed for a good amount and pay dividends regularly.

• Stock exchanges only list shares of publicly traded corporations, while many businesses issue shares.

What Are Shares?

A company’s shares are its ownership units. Despite their frequent interchangeability, “stocks” and “shares” have different meanings. Everything depends on how you discuss a company and the extent of your ownership. 

Let’s take a scenario where the XYZ corporation issued stock, and you bought ten shares. If each share is worth 1% of the total, you own 10% of the business. You purchased shares of the stock that the company issued.

In other words, you don’t actually buy stock; you buy shares of it. Shares are what you own, whereas stock is a broader term that describes the financial instruments a corporation issues.

How Shares are Issued and Regulated?

Usually, the number of shares that can be granted to a corporation’s board of directors is limited. We refer to these These are referred to as authorised shares. The quantity of shares sold to shareholders and tallied for ownership is known as issued shares. Thus, a company may issue just 8 million of the 10 million authorised shares.

The number of authorised shares affects shareholders’ ownership, thus shareholders have the power to vote to restrict that number as they see fit. When shareholder wants to increase the authorised shares, they meet to discuss and decide on issues related to the approval of new shares. The purpose of the meeting is for shareholders to discuss and decide on issues related to the approval of new shares. Articles of amendment are filed with the state to propose changes to the permitted number of shares formally.

Publicly traded corporations list their shares on markets for the general public, usually through an initial public offering (IPO). This is a costly, time-consuming, and highly regulated procedure in which a business must undergo stages of fundraising and regulatory inspection.

Types of Shares

Let’s look into the classification of different types of shares.

Equity Shares Dependent on Share Capital

• Authorised share capital: Every business must specify the maximum capital that can be raised through the issuance of equity shares in its Memorandum of Associations. However, if certain legal procedures are finished and additional fees are paid, the limit can be raised.

• Issued share capital: This refers to the allocated part of the business’s capital that has been made available to investors by way of equity share issuance. For instance, the issued share capital will be Rs 40 lakh if the company issues 20,000 equity shares at a nominal value of Rs 200 each.

• Subscribed share capital: Subscribed share capital is the part of the issued capital that investors have purchased.

• Paid-up capital: Paid-up capital is the sum investors have paid to own the company’s equity. The terms “subscribed” and “paid-up capital” refer to the same sum because investors pay the whole amount at once.

Equity Shares According to the Definition

The equity share classification according to the definition is shown here:

• Bonus shares: The term “bonus share” refers to additional shares that are given to current shareholders as a bonus or at no cost.

• Rights shares: A corporation that has rights shares may issue new shares to its current owners at a predetermined price and time frame prior to the shares being made available for purchase on stock exchanges.

• Sweat equity shares: If you have contributed significantly to the company while working there, the employer may give you sweat equity shares as a form of recognition.

• Voting and non-voting shares: Although most shares include voting rights, the business reserves the authority to provide shareholders with differential or non-voting rights.

Preference Shares

When it comes to a company’s profitability, preferred preferential shareholders are given preference over common shareholders. Moreover, preferential shareholders receive payment ahead of common shareholders in the case of a company’s liquidation.

• Cumulative and non-cumulative: In the case of cumulative preference shares, the benefit is carried over to the following fiscal year if the issuing business does not declare an annual dividend. Recipients of non-cumulative preference shares are not eligible for exceptional dividend benefits.

• Participating/non-participating preference shares: Following the company’s distribution of dividends, owners holding participating preference shares are entitled to any excess earnings. This is in addition to getting dividends. Apart from the dividends that are paid on a regular basis, non-participating preference shares have no further advantages.

• Convertible and non-convertible preference shares: Convertible preference shares have the ability to be converted into equity shares upon fulfilling the necessary requirements outlined in the (Article of Association) (AoA) of the company. Non-convertible preference shares do not have this ability.

Redeemable and non-redeemable preference share: A business may repurchase or assert redeemable preference shares at a predetermined cost and duration. There is no maturity date for these kinds of shares. Conversely, there are no requirements of this kind for irredeemable preference shares.

Why Invest in Shares?

The following are the key reasons to invest in the shares:

1. Potential for higher revenues

Investors opt to invest in stocks because they have a better potential return than alternatives like gold, bank deposit certificates, and Treasury bonds.

2. Protection of your finances from inflation

Gains in the stock market often exceed the pace of inflation. Stocks have traditionally been a useful tool for fending off inflation.

3. Steady passive income

Many businesses pay dividends or a portion of their revenues to their shareholders. Most firms pay quarterly dividends, however others do so on a monthly basis.

4. Pride in ownership

A share of stock represents a portion of a company’s ownership. You can invest a small sum of money in a business whose goods or services you find valuable.

5. Liquidity accessibility

Since most stocks are traded publicly on a large stock exchange, buying and selling them is easy. Additionally, stocks are a more liquid investment compared to other options like real estate assets, which are difficult to sell.

6. Adding Variability

Purchasing a variety of shares enables you to build a diversified portfolio that spans multiple industries easily. This diversificationThis important diversification lowers your risk profile while increasing earnings by dividing your entire investing portfolio among bonds, real estate, and even cryptocurrency.

7. Adaptability to start out slowly

With shares, you can buy equities for as little as INR 100. One can begin small as no fees are involved and multiple internet brokers provide fractional shares.

Conclusion

Purchasing shares has the potential to generate long-term wealth for any individual investor. You can choose from a wide range of sectors and industries, which can help you diversify your investments and lower your risk with stocks. Remember to select reputable and trustworthy financial partners before opening a trading or Demat account.

Frequently Asked Questions (FAQs)