When a corporation wishes to obtain cash to expand its business or operating needs, it has two options: borrow money or issue stocks that give investors a stake in the firm. Shares are the lowest denomination of a company’s stock, representing a fraction of the company’s ownership. In layman’s terms, a share is a unit of ownership in a certain company. If one is a shareholder of a company, it means that the person, as an investor, owns a portion of the issuing company. As a shareholder, he stands to gain from the company’s earnings while simultaneously bearing the costs of the company’s losses.
Table of Contents
- What are shares?
- Types Of Shares And Their Issue | Download PDF
- Sneak Peek Into the Ebook
- Types Of Shares And Their Issue
- Equity Shares
- Classification Of Equity Shares Based On Definition
- Classification Of Equity Shares Based On Returns
- Classification Of Preference Shares
- Steps Involved In The Issue Of Shares Are As Follows:
- The Bottom Line
Shares are units of equity ownership in a corporation. For some companies, shares exist as a financial asset providing for an equal distribution of any residual profits, if any are declared, in the form of dividends. Shareholders of a stock that pays no dividends do not participate in a distribution of profits. Instead, they anticipate participating in the growth of the stock price as company profits increase.
Shares represent equity stock in a firm, with the two main types of shares being common shares and preferred shares. As a result, “shares” and “stock” are commonly used interchangeably.
Use the link below to download the short notes on Types Of Shares And Their Issue – Types, Classification, Bonus Shares for CAIIB and JAIIB exams.
Sneak Peek Into the Ebook
After discussing what a share is, Let’s discuss the different types of shares.
- Equity Shares
- Preference Shares
Equity shares are a long-term source of funding for any company. These are non-redeemable shares that are issued to the general public. Investors in such shares have the opportunity to vote, share earnings, and claim a company’s assets. In the case of equity shares, you can state the value in various ways, such as par value, face value, book value, and so on. These are also known as ordinary shares, and they make up the majority of the shares issued by a company. Equity shares are transferable and actively exchanged in stock markets by investors. As an equity shareholder, one can vote on corporate matters and collect dividends. On the other hand, dividends are not fixed and are paid out of the company’s profits. One should also remember that equity stockholders face the most risk due to market volatility and other variables impacting stock markets in proportion to their investment size.
Let’s discuss the classification of equity shares based on Definition
Bonus shares are additional shares issued to present shareholders at no extra cost based on the number of shares a shareholder holds. These are the company’s accumulated earnings turned into free shares rather than dividends.
The term “Right Shares” refers to the shares a company provides to its current owners at a reduced price. The corporation’s shareholders have the right to approve or reject the offer, and there are minimal conditions for share subscriptions if the shareholder accepts the proposal.
Sweat equity shares are distributed to staff or directors in exchange for intellectual property rights, know-how, or other value additions to the company. These shares are only distributed to employees or directors when exercising their ESOP (Employees Stock Option Plan) grant option.
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Even though the majority of shares have voting rights, the company can create an exception and grant differential or zero voting rights to shareholders.
Now Let’s discuss the classification of equity shares based on Returns
A dividend is a monetary or non-monetary incentive given to its shareholders. Companies can pay out dividends in various ways, including cash, shares, or any other form. Dividends are often a portion of a company’s profit that it distributes to its shareholders. A company might opt to pay dividends by issuing new shares on a pro-rata basis.
These kinds of shares are associated with companies that have seen rapid development. While such companies may not pay dividends, the value of their stocks rises fast, rewarding investors with capital gains.
These shares are traded on stock exchanges at lower prices than their true worth. Investors might anticipate that prices would rise over time, giving them a higher share price.
Preference shares promise the bearer a set and consistent dividend, with payment before equity share distributions. The capital raised via the issuance of preference shares is referred to as preference share capital.
The primary distinction between preference and equity shareholders is that preference shareholders have a stronger position than equity owners. Preference shareholders receive a fixed and consistent dividend from the company’s revenue before equity owners receive any dividend.
If a company does not declare an annual dividend on cumulative preference shares, the benefit is carried over to the following financial year. Non-cumulative preference shares do not provide for the payment of overdue dividends.
Participating preference shares allow owners to collect excess profits after the firm pays dividends, and this is in addition to the receiving of dividends. Apart from receiving dividends regularly, non-participating preference shares provide no such benefits.
Convertible preference shares can be converted into equity shares if the company’s Articles of Association (AoA) are satisfied, but non-convertible preference shares have no such benefits.
A company can repurchase or claim redeemable preference shares at a set price and time, and these shares do not have a maturity date. On the other hand, irredeemable preference shares are not subject to such restrictions.
The procedure through which businesses distribute new shares to shareholders is known as the issue of shares. Companies and individuals can both be shareholders. While circulating the shares, the company adheres to the procedures outlined in the Companies Act of 2013.
The amount on the company’s shares may be gradually collected in easy installments that are spread over a time frame based on its increasing financial responsibility, which is a notable aspect of the company’s capital. The first installment is collected with the application. It is hence referred to as application money, the second is on allocation (also known as allocation or allotment money), and the third is referred to as a 1st call, 2nd call, and so on.
Issue Of Prospectus
The prospectus is originally distributed to the general public by the company. The prospectus is an announcement to the public that a new venture has emerged and that it will require capital to operate the trade activity. It contains detailed information about the business and how prospective investors will collect the money.
Receipt Of Applications
When the prospectus is distributed to the public, potential investors who wish to join up and subscribe for the enterprise’s share capital would submit an application together with the application money and deposit it with a designated bank as specified in the prospectus.
The shares can be allocated after the minimum subscription has been met. Because there is always an oversubscription of shares, the allocation is done on a pro-rata basis. Letters of Allotment are distributed to those who have been assigned their share of the company. As a consequence, a genuine contract is formed between the enterprise and the claimant, who is now a part-owner of the enterprise.
The Bottom Line
As a result, there are two kinds of shares: equity shares and preference shares. Each has its own set of sub-categories. Following that, we explored the procedures that companies must follow when they issue shares to the general public.
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