Types of Shares : Stock Market : NISM
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Most companies only ever have one type of shares (or class of share). The shares are commonly called ordinary shares and will be the ones the company was incorporated with.
However, in general, if a company has more than one type of share the main differences between them will be found in one or more of the following areas:
Entitlement to dividends: Shares may have the right to normal dividends, preferential dividends (that is, the right to be paid a dividend before other share classes), a dividend only in certain circumstances or no dividends at all.
Entitlement to capital on winding up: If the company is dissolved any assets left after the company’s debts are paid can be distributed to shareholders. However, different share classes may have different rights to capital distribution – with some shares ranking first and others only paid if sufficient assets remain after others have received their full distribution of capital.
Voting rights: Usually, this is as simple as shares either carrying voting rights or not. However, weighted or tiered voting rights are also possible – so, for example, shares may carry extra voting rights in certain circumstances or on certain important matters affecting the company.
Types of Shares as below:
1. Ordinary shares
These carry no special rights or restrictions. They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears).
Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.
2. Deferred ordinary shares
A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating. On a winding up they will only receive something once every other entitlement has been met.
3. Non-voting ordinary shares
Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all. They may also preclude the shareholder even attending a General Meeting. In all other respects they will have the same rights as ordinary shares.
4. Redeemable shares
The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common.
The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option.
If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.
5. Preference shares
These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year. This is received ahead of ordinary shareholders. The amount of the dividend is usually expressed as a percentage of the nominal value. So, aRs.10, 5% preference share will pay an annual dividend of Rs.0.50. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it. On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders. Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).
6. Cumulative preference shares
If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves. It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid.
By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.
7. Redeemable preference shares
Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder therefore benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.
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