Define Shares and Its Types: Everything You Need to Know
To define shares and its types, one needs to have a basic understanding of shares and their purpose and role in a company.3 min read
To define shares and its types, one needs to have a basic understanding of shares and their purpose and role in a company. Shares are a standard instrument for raising capital for a business by distributing them among interested investors.
The Definition of a Share
The definition of a share includes the capital or stock of a company. Each business has a share capital requirement. A share is a single unit within the entire capital of the company.
A share is also a type of security. It is often measured by its liability and interest. Members that own shares of a company are referred to as shareholders. They are investors that have invested funds into the business. In return, they will receive dividends on the profits of the business.
The Characteristics of a Share
Shares operate under the following characteristics:
- A share should be moveable. The rules for share transfer must be included in the company's Articles of Incorporation.
- The funds used to purchase a share are non-refundable. This, however, will be affected by business dissolution or capital reduction.
- Each share must be assigned a number. This helps to track and monitor individual shares. This requirement, however, is not present in all shareholder agreements.
Types of Shares
There are also different types of shares available within a company:
- Preference shares: Preference shares have preferential rights to dividends if a business closes. Preference shares do not have voting rights available, except in specific situations.
- Equity shares: Equity shares do not have preferential rights. Instead, they receive payment from dividends and repayment of capital after preference shares' claims were settled. The specific rate of return is decided by the board members and directors. Equity shares are often used to raise money for the company and are referred to as the owner's funds. It is possible that an equity share will not pay any dividends if the business does not profit. While preference shareholders get a fixed rate, equity shareholders may receive varying payments each year. Equity shareholders are often owners of the company and have regular voting rights available. They may also be subject to things like deferred shares or founder's shares.
- Cumulative preference share: A cumulative preference shareholder does not receive payment when a profit is not made. However, cumulative shares may be paid through unpaid dividends. A cumulative preference shareholder is only paid after other shareholders have been paid. If no funds remain, then they will not receive a payment that year.
- Non-cumulative preference shares: Non-cumulative preference shareholders have preferential shareholder rights and receive a fixed dividend payment. However, they are only paid if profits remain. If no profits left, the owed amount is not carried over to the following years.
- Redeemable preference shares: Any capital collected from selling shares is not paid to a shareholder. But, any capital raised through preference shares can be paid to the shareholder at the end of the period. There may be time limits on these redeemable shares, which sometimes exceed 10 years or more.
- Participating/Non-participating preference shares: These shares are paid through a combination of profits and fixed rates. Once all profits have been paid to shareholders, any extra money is divided equally among these shareholders.
- Convertible preference shares: Convertible preference shares can be converted into equity shares at a preset time. All conversions must be approved based on the regulations set in the company Articles of Incorporation.
Structure of Equity Shares
Equity shareholders are often owners or operating partners in the business. Their shares are considered venture capital and are one of the most common types of shares within a business. They do not risk the funding of a company because equity shareholders are not paid unless profits are made. They are important to the structure of the business because they raise funds that are needed to grow and operate the business.
Additionally, an equity shareholder is not paid until all other types of shareholders are paid. Dividend payment amounts are often based on how much the company has profited. Equity shareholders are ideal for investors that want a little more risk in return for the possibility of a higher payout.
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