Types of Shares & Their Issue, Complete Details & Classification

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.

What are shares?

Shares are units of equity ownership in a corporation. Shares exist as financial assets that provide for an equal distribution of any residual profits. The companies declare these residual profits, if any, in the form of dividends. Shareholders of a stock that pays no dividends do not participate in the 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, most use “shares” and “stock” interchangeably.

Types Of Shares And Their Issue PDF

Use the link below to download the short notes on Types Of Shares And Their Issue – Types, Classification, and Bonus Shares for CAIIB and JAIIB exams.

1. Types of Shares

Shares represent ownership in a company and are broadly classified into Equity Shares and Preference Shares.

A. Equity Shares (Ordinary Shares)

Equity shares are a long-term source of funding for any company. The company issues these non-redeemable shares to the 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. Equity shares are also known as ordinary shares, and they make up the majority of the shares issued by a company.

Features of Equity Shares:

• Voting Rights: Equity shareholders have voting rights in company decisions.
• Dividends: They receive dividends, but these are not fixed and depend on company profits.
• Higher Risk: In case of liquidation, equity shareholders are the last to receive their share.
• Capital Appreciation: Investors benefit from price appreciation in the stock market.

B. Preference Shares

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. Preference shares give holders preferential rights over equity shareholders regarding dividends and capital repayment during liquidation.

Types of Preference Shares:

1. Cumulative Preference Shares – Unpaid dividends accumulate and are paid in the future.
2. Non-Cumulative Preference Shares – Dividends do not accumulate if unpaid.
3. Convertible Preference Shares – Can be converted into equity shares after a specified period.
4. Non-Convertible Preference Shares – Cannot be converted into equity shares.
5. Redeemable Preference Shares – Can be repurchased by the company after a certain period.
6. Irredeemable Preference Shares – Cannot be redeemed and exist indefinitely.

2. Types of Share Issue

The procedure through which businesses distribute new shares to shareholders is known as the issue of shares. Companies and individuals can both be shareholders. Companies issue shares to raise capital, and different methods are used for this purpose.

A. Public Issue (IPO & FPO)

1. Initial Public Offering (IPO):
   • The first-time issuance of shares to the public.
   • Used by companies to get listed on stock exchanges.
2. Follow-on Public Offering (FPO):
   • When a listed company issues additional shares to the public.
   • Used for expansion, debt repayment, or other financial needs.

B. Private Placement

• Shares are issued to a select group of investors rather than the public.
• Can be done through Qualified Institutional Placement (QIP) for institutional investors.

C. Rights Issue

• Existing shareholders are offered additional shares at a discounted price.
• Helps companies raise funds without bringing in new investors.

D. Bonus Issue

• Free shares issued to existing shareholders based on their holdings.
• Used as a reward mechanism when companies have surplus profits.

E. Preferential Allotment

• Shares are allotted to specific individuals, institutions, or promoters at a pre-determined price.

Steps Involved In The Issue Of Shares

Check out the steps involved in the issue of shares below:

Issue Of Prospectus

The company distributes the prospectus to the general public. 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

Once the company distributes the prospectus, potential investors submit an application with the application money and deposit it with a designated bank specified in the prospectus.

Allocation Of Shares

Companies allocate shares after the minimum subscription has been met. This is usually done on a pro-rata basis since there is always an oversubscription of shares. The company distributes the Letters of Allotment to those who have been assigned their share of the company. This forms a genuine contract between the enterprise and the claimant, who will now be a part-time owner of the enterprise.

3. Classification of Shares Based on Different Criteria

Apart from equity and preference shares, shares can be classified based on:

A. Based on Ownership

1. Promoter Shares – Held by the company’s founders and management.
2. Public Shares – Held by retail investors, mutual funds, and institutional investors.

B. Based on Transferability

1. Listed Shares – Traded on stock exchanges.
2. Unlisted Shares – Not traded on stock exchanges but can be transferred privately.

C. Based on Voting Rights

1. Voting Shares – Allow shareholders to participate in company decisions.
2. Non-Voting Shares – Do not grant voting rights but may offer higher dividends.

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