Note on Meaning and Types of Shares

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Meaning of Share

Each unit of ownership denotes an equal amount of a business's wealth. It enables the shareholders to an equal right to the business's profits and an equal responsibility for the business's arrears and deficits. A share is a document that acknowledges the ownership of a company to the limit of the amount contributed. So, the share is defined as an interest in the company reflecting the ownership then and entitling to receive profit proportionately.

The share capital of a company is divided into fixed number of units and each such unit is called a share. Major types of shares are one having voting and major company rights and claim holders of the profit and the other are the one who have no voting rights or major company rights but are promised of a certain periodic income or interest. Therefore, a share can be defined as a unit of share capital reflecting the extent of the interest of a shareholder.

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Types of Shares

The shares of the company can be divided into the following categories:

  1. Equity shares

Equity shares are also called ordinary shares. These shares have no preferential rights on the payment of dividend or repayment of capital. The amount of dividend on such shares is not fixed. The dividend on these shares is paid from profits only after paying interest on debentures and dividends in preference share capital. Similarly, equity shareholders are paid only after the payment of all debts and preference share capital at the time of winding-up of the company. Equity shareholders are the true risk bearers of the company and they are the ultimate claimants of the profit. Another feature of equity shares is that the equity shareholders enjoy the voting rights for the management and control of the company. Equity shares are important to the company as well as to the shareholders. Its importance can be pointed out as follows:

  • Importance to the company:

There is no need to pay the dividend in case of the loss or deficit of the company. Another major important aspect of equity shares is that there is no need to refund money to the equity shareholders before winding-up of the company so that the company can utilize the equity share capital permanently. Also, the board of directors and its head are elected from the equity shareholders for the effective management of the company. So, equity shareholders hold a powerful position in the company.

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  • Importance to the shareholders:

Every shareholder has a voting right to elect the company’s board of directors. Equity shareholders can claim and enjoy a higher amount of dividend in case of a higher profit of the company. So, if any company gains huge profit in a year then equity shares are benefited the most as they get the huge amount of dividend more than preference shareholders. Equity shareholders can also easily sell or transfer their shares to others.

  1. Preference Shares

Preference shares are those shares that are entitled to certain privileges. The dividend on preference share is paid at a fixed rate. The dividend on such shares is paid before any dividend is paid to equity shareholders. So, from the profit of the company, the first claim of the profit amount goes to the preference shareholders. So, preference shareholders can be taken as the secured shares as it provides fixed benefit and security to the owners. Similarly, at the time of winding-up the company, the preference capital is repaid before such a repayment is made to the equity shareholders. However, the preference shareholders do not have any voting rights or major company rights which are enjoyed by the equity shareholders. They cannot influence the major decisions of the company nor can they participate in the board of directors. The major types of preference shares are as follows:

  • Cumulative preference shares: Cumulative preference shares are those shares on which a number of unpaid dividends are accumulated and is carried forward as a liability. Therefore, the unpaid dividends of the past years are paid when adequate profits are earned by the company. If the Article of Association of the company is silent about the accumulation of dividends on preference shares, it is assumed that such shares are cumulative. When there is the huge amount of profit in the next years, the cumulative figure or amount is paid off to the preference shareholders.

  • Non-Cumulative preference shares: Non-cumulative preference shares are those shares on which the arrears of dividend do not accumulate. As such, the arrears of past years’ dividend on account of no profit or loss are not paid in the following years. So ,the figure is not added for the upcoming years but is to be paid in the same year.

  • Redeemable preference shares: Redeemable preference shares are those that can be redeemable within a specific period of time. The terms and conditions for redemption of preference shares need to be specified at the time of the issue of shares.

  • Irredeemable preference shares: Irredeemable preference shares are those which cannot be redeemed within a specific period of time but can be redeemed only at the time of liquidation of the company. The amount of capital is not paid back to the shareholders before winding-up of the company.
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  • Participating preference shares: Participating preference shares are those preference shares which have a certain right to participate in any surplus profit of the company after paying a dividend to equity shareholders. They are specified in the Article of Association during the time of purchase of the preference shares.

  • Non-participating preference shares: Non-participating preference shares are those shares which do not carry any such rights in the profit or surplus of the company after the payment of the dividend of the equity shareholders. If the Article of Association of the company is silent, preference shares are assumed to be non-participating preference shares.

  • Convertible preference shares: Convertible preference shares are those shares which can be easily converted into equity shares. The conversion becomes possible when the company provides such opportunity to the preference shareholders. These shares are converted into equity shares according to the terms and conditions of their issue and decisions of the company.

  • Non-Convertible preference shares: Non-convertible preference shares are those which cannot be converted into equity shares. Usually, preference shares are non-convertible unless it is stated in the Articles of Association and by the company.

Hence these are the various types of preference shares. Hence a preference share might be cumulative or non-cumulative, redeemable or Irredeemable, Convertible or Non-convertible and participating or non-participating according to their nature and the policy of the company.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. A Share can be defined as unit of share capital reflecting the extent of interest of a shareholder.
  2. Two major types of shares are ordinary shares and preference shares.
  3. A preference share might be cumulative or non-cumulative, redeemable or Irredeemable, Convertible or Non-convertible and participating or non-participating.
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