Investment Options: The Various Types of Shares Available

In the dynamic world of investing, understanding the fundamentals is crucial before making any financial decisions. One such fundamental is comprehending the different types of shares that companies issue to raise capital. Shares represent ownership in a company and entitle shareholders to a portion of the profits. However, not all shares are created equal. This article offers a detailed overview of the different types of shares, focusing on the two primary categories: types of equity shares and types of preference shares. This extensive guide will help you grasp each share type’s meaning, significance, and usage so you can make smart investment decisions.

Now, let’s delve into the various types of shares. This article will discuss them in detail. 

Understanding the Concept of Shares

In simple terms, a share is a unit of ownership in a company. When individuals purchase shares, they gain partial ownership and certain rights, such as receiving dividends or voting on significant matters. The value of shares fluctuates based on market conditions and company performance. Investors frequently search for “types of shares” to understand how different categories impact their rights and returns.

Shares are broadly divided into two categories:

1. Equity Shares
2. Preference Shares

These two categories serve different purposes and cater to diverse investor needs. Let’s first examine the types of equity shares, which form the backbone of most corporate structures.

Types of Shares in India

How many types of shares are there? What are the advantages and disadvantages of these types of shares in a company? Let’s find out! 

Types of Equity Shares: The Backbone of Ownership

Equity shares, also known as ordinary shares, are the most common type of shares issued by companies. They form the core of the company’s share capital and signify true ownership. If you’re researching the types of shares available for high-risk, high-reward investments, equity shares are your go-to choice.

1. Ordinary Equity Shares: These are the standard form of equity shares that offer voting rights and the potential to receive dividends based on the company’s profitability. They carry the highest risk but also the highest potential for capital appreciation.
   
2. Right Shares: These are offered to existing shareholders at a discounted price before the company makes a public offer. It enables shareholders to maintain ownership and helps the company raise additional capital efficiently.
   
3. Bonus Shares: Issued from the company’s reserves, bonus shares are distributed to existing shareholders free of cost. These shares are issued in a certain ratio to the shares already held. Among the types of equity shares, bonus shares are seen as a reward mechanism.
   
4. Sweat Equity Shares: These are granted to company employees or directors as a reward for their contributions. They help retain talent and motivate employees to work in the company’s best interest.
   
5. Voting and Non-voting Shares: While most equity shares offer voting rights, some companies issue non-voting shares to raise capital without diluting control.

The types of equity shares an investor chooses depend on their financial goals, risk appetite, and interest in company management. These shares are ideal for investors focused on wealth accumulation and long-term gains.

Advantages of Equity Shares 

The following are the benefits of equity shares: 

1. Higher Return on Investment

Equity shares involve a huge amount of entrepreneurial risk. The greater the risk factor, the higher the return potential. The investor also enjoys the company’s profits and dividends. 

2. Easy and Efficient

Investing in equity shares is easy. With the help of a financial advisor, a shareholder can invest in the stock market. Here, investors can easily buy or sell the stock without significantly impacting its market price.

3. Ownership Control

When an investor buys a company share, they also claim partial ownership. The higher the number of equity shares, the greater their power within the organization.

Disadvantages of Equity Shares 

Here are some drawbacks of equity shares

1. Company Performance Risks

Investors in equity shares have the last claim to company profits. The company distributes dividends first to bond and preference stakeholders and then to equity shareholders.

This means that if the company performs poorly and the profit is low, equity shareholders will have to settle for a lower amount.

2. Market Risks

Equity shares do not guarantee returns. If a company shows poor performance, its market price drops. Thus, shareholders have to sell their shares at a low price. 

Types of Preference Shares: Stability and Priority

Preference shares are so named because they offer shareholders preferential treatment over equity shareholders regarding dividend distribution and capital repayment during liquidation. These shares usually have a fixed dividend rate and limited or no voting rights.

1. Cumulative Preference Shares: These allow shareholders to accumulate dividends if not paid in a particular year. The unpaid dividends are carried forward and paid in subsequent profitable years.
2. Non-Cumulative Preference Shares: In contrast, if the company does not declare dividends in a financial year, the shareholders lose the right to claim them.
3. Participating Preference Shares: If the company performs exceptionally well, these shareholders may receive extra dividends in addition to the fixed dividend.
4. Non-Participating Preference Shares: These only receive the fixed dividend and do not participate in surplus profits.
5. Convertible Preference Shares: These can be converted into equity shares after a predetermined period. This feature provides flexibility to investors who wish to benefit from company growth.
6. Non-Convertible Preference Shares: These remain preference shares throughout their tenure and cannot be converted to equity.

Understanding the types of preference shares is essential for investors who prefer stable income with lower risk exposure. Preference shares offer a solid solution for anyone analyzing the types of shares best suited for passive income.

Key Features of Preference Shares:

1. Fixed Dividend Rates

Preference shares enable investors to receive dividend payouts without fail. Other stakeholders may receive them later. Or even worse, they may not receive them at all.

2. Priority in Receiving Dividends

As mentioned, when the company announces it will pay dividends, preference shareholders receive them first. 

3. Limited Voting Rights

Under special circumstances, they also have the right to vote. Generally, purchasing shares doesn’t give a company the right to participate in management. Thus, this only happens rarely.

Also read: How to Invest in Stock Market in India: Guide for Beginners

Advantages of Preference Shares

The benefits of preference shares are as follows:

1. Regular Income

Like equity shares, preference shares represent partial ownership in the company. However, unlike equity shareholders, preference shareholders receive a fixed dividend payout. 

2. Low-risk Investment

If the firm winds up under unfortunate circumstances, the preference stakeholders have higher claims than equity shareholders. Thus, the risk factor is low here. 

3. Dividend Preference

Regarding dividends, preference shareholders have the advantage of receiving them first. Any other shareholder enjoys the dividend benefits after them. 

Disadvantages of Preference Shares

These are a few disadvantages of preference shares:

1. Lower Returns 

Fixed dividends on preference shares become less attractive when a company earns a huge amount. They cannot take full advantage of the company’s prosperity.

2. Limited Capital Appreciation Potential 

Capital appreciation is the increase in the market price of an investment. Preference shareholders enjoy company profits before equity shareholders. 

Convertible Shares 

Convertible shares, usually preference shares, can be converted to equity shares. Companies usually fix the price at which the shares can be converted when issuing them.

The different types of convertible shares include:

1. Mandatory

The investors are obliged to convert the shares on the due date. 

2. Reverse 

Here, the company can make a choice. They can convert the share to equity at the predetermined conversion price on the due date. Or they can buy the share in cash. 

3. Vanilla

The investor decides whether to convert the share to equity or keep it till maturity. 

Cumulative and Non-cumulative Shares 

Non-cumulative shares are the ones with no accumulation of dividends. This is mostly because the non-cumulative shareholders are paid from the company’s net profits from the present year. So, if the company incurs a loss in a particular year, shareholders cannot claim the outstanding dividends from its future profits. 

Cumulative shares allow the shareholder to receive dividends in arrears. If a company is running at a loss and cannot pay dividends now, it is obliged to pay the cumulative dividends in the following year. 

Redeemable and Irredeemable Shares 

Redeemable shares are shares that companies can repurchase or claim after a fixed period. The redemption price is predetermined. The company can buy the shares back at the predetermined price range at any time. 

Irredeemable shares cannot be redeemed during the company’s active lifetime. The shareholders can initiate their claim to the assets only when the company decides to wind up. 

Key Differences Between Equity and Preference Shares

Understanding the different types of shares helps investors choose the right combination of ownership and income potential. It also ensures that you select the most appropriate types of shares for your portfolio.

Benefits of Investing in Different Types of Shares

• Equity Shares provide higher returns over the long term through capital gains and participation in company profits.
• Preference Shares offer stable income and security of returns due to fixed dividends.
• Investors can diversify their portfolios by choosing a mix of both, depending on their risk tolerance and financial goals.

When planning a long-term investment strategy, knowing the different types of shares can help create a balanced portfolio that meets income needs while offering growth potential. Searching for the “types of shares to invest in” will often lead to this helpful distinction.

How to Choose the Right Type of Share?

1. Investment Goals: Are you looking for growth or consistent income?
2. Risk Appetite: Can you tolerate market volatility or prefer low-risk investments?
3. Time Horizon: Long-term investors may prefer equity shares, while short-term investors might find preference shares more suitable.
4. Company Performance: Consider the company’s financial health, dividend history, and future growth potential.

Choosing between equity shares and preference shares depends on a clear understanding of personal financial objectives. Comparing the types of shares through these parameters is a necessary step for serious investors.

Conclusion: Building Your Investment Foundation

Shares are not just financial instruments but tools of wealth creation and ownership. Knowing what the different types of shares are enables you to make informed decisions based on your financial goals. While equity shares are suited for those looking to grow their wealth over time, preference shares provide security and consistent returns.

With a detailed understanding of the different types of shares, including the varied types of equity and preference shares, you can confidently step into the investing world. Balance, clarity, and strategy are your best allies in building a future-proof portfolio. As more people search for insights into the “types of shares available in India” or globally, having this foundational knowledge gives you a competitive advantage in decision-making.

Frequently Asked Questions