Types of Shares

Shares refer to interests or stake held by individuals or corporations in a company, which allows them to share the profits or losses of the firm. They represent the ownership of a company. The company issues shares, also known as stock, in exchange for money. Those who buy shares of stock are known as shareholders, and they represent ownership of the firm.

There are different types of shares or stock that a company can issue to raise funds. The three major types of shares are ordinary shares, preference shares, and deferred shares.

1) Preference shares:

Also known as preferred stock, this is a type of shares which enables the shareholder to receive a fixed rate of dividend. They are the first in line to be paid dividends before any amount is paid to ordinary shareholders. When the company goes bankrupt, preference shareholders are paid first before common stockholders. However, preference shares do not have voting rights like ordinary shares, which means that preferred stockholders do not vote on issues in the company such as election of CEO. Preference shares are in two types: cumulative and non-cumulative preference shares.

    1. Cumulative preference shares allow shareholders to receive their current dividends from next year’s profits if this year’s profits are not sufficient to pay dividends.
    2. Non-cumulative preference shares are those that do not allow shareholders to get dividends from next year’s profits even if there is little profit to pay dividends in the current year.

2) Ordinary shares:

These are shares that receive dividends only after the fixed dividends on preference shares have been paid. Ordinary shareholders have no limit on dividends; they can earn higher dividends if profits are large. This type of shares does not give stockholders any dividend if the company experiences a loss or bankruptcy.

3) Deferred Shares:

These shares come last in the order of dividend payment. They only receive their dividends after all other classes of shares have received theirs. Generally these shares are issued to the promoters and to the persons who have helped in the formation of the company.

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