Shares are units of ownership in a company that represent a claim on the company’s assets and earnings. When you hold shares in a company, you are a shareholder and have certain rights, such as the right to receive dividends, attend shareholder meetings, and vote on important company matters. Shares are a common form of equity investment in both public and private companies.
Meaning of Shares
Shares represent a portion of a company’s equity capital. They are issued by companies to raise capital for various purposes, including business expansion, operations, and investments. When an individual or entity purchases shares, they become a shareholder and acquire ownership in the company proportionate to the number of shares they hold. The ownership of shares entitles shareholders to certain rights and benefits, such as dividends and voting rights.
Kinds of Shares
Companies may issue different types or classes of shares to meet specific objectives or to cater to the preferences and requirements of investors.
- Ordinary Shares (Common Shares):
- These are the most common type of shares issued by companies.
- Holders of ordinary shares have voting rights and typically receive dividends.
- In the event of liquidation, ordinary shareholders have a claim on the company’s assets after all other obligations have been satisfied.
- Preference Shares:
- Preference shares entitle shareholders to preferential treatment in terms of dividends and repayment of capital.
- Holders of preference shares receive fixed dividends before ordinary shareholders.
- In the event of liquidation, preference shareholders are prioritized in the distribution of assets.
- Typically, preference shareholders do not have voting rights or their voting rights are limited.
- Cumulative Preference Shares:
- Cumulative preference shares accumulate unpaid dividends if the company does not pay them in a given year.
- Accumulated dividends must be paid before any dividends are distributed to ordinary shareholders.
- Non-Cumulative Preference Shares:
- Non-cumulative preference shares do not accumulate unpaid dividends. If the company does not pay dividends in a particular year, the right to those dividends is forfeited.
- Redeemable Preference Shares:
- Redeemable preference shares can be redeemed (bought back) by the company at a predetermined future date or upon meeting specific conditions.
- The redemption price is usually set at the time of issuance.
- Convertible Preference Shares:
- Convertible preference shares can be converted into a specified number of ordinary shares after a predetermined period or under specific conditions.
- This allows shareholders to participate in potential capital appreciation.
- Participating Preference Shares:
- Participating preference shares give shareholders the right to receive additional dividends beyond the fixed rate if the company’s profits exceed a certain threshold.
- These shares combine features of both preference and ordinary shares.
Statutory Restrictions on Shares
Companies are subject to statutory regulations and restrictions related to shares. These restrictions may vary by jurisdiction but often include:
- Minimum Share Capital: Some jurisdictions require companies to have a minimum amount of authorized and paid-up share capital at the time of incorporation.
- Issuance of Shares: Companies must comply with regulations governing the issuance of shares, including the issuance process, record-keeping, and reporting to regulatory authorities.
- Transfer of Shares: Shares may be subject to restrictions on their transferability, such as pre-emptive rights for existing shareholders or restrictions on selling to outsiders.
- Voting Rights: Statutory provisions often define the voting rights associated with different classes of shares, particularly for preference shares.
- Disclosure Requirements: Companies are required to disclose information about their share capital, shareholders, and share transactions in annual reports and regulatory filings.
- Buyback of Shares: Companies may be subject to restrictions on buying back their own shares, including the timing and method of buybacks.
- Dividend Payments: Statutory regulations may govern the payment of dividends, ensuring that they are paid from profits and not from capital.
