Notes, Exercises, Videos, Tests and Things to Remember on Meaning and Types of Shares
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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.
The shares of the company can be divided into the following categories:
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:
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.
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.
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:
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.
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