Quick Summary
Types of shares are a key concept every investor should understand before making financial decisions. In the dynamic world of investing, understanding the fundamentals is crucial before committing capital. One such fundamental is comprehending the different types of shares that companies issue to raise funds. Shares represent ownership in a company and entitle shareholders to a portion of the profits. However, not all shares are created equal. This article offers a detailed overview of the different types of shares, focusing on the two primary categories: types of equity shares and types of preference shares. This extensive guide will help you grasp each share type’s meaning, significance, and usage so you can make smart investment decisions.
Now, let’s delve into the various types of shares. This article will discuss them in detail.
In simple terms, a share is a unit of ownership in a company. When individuals purchase shares, they gain partial ownership and certain rights, such as receiving dividends or voting on significant matters. The value of shares fluctuates based on market conditions and company performance. Investors frequently search for “types of shares” to understand how different categories impact their rights and returns.
Shares are broadly divided into two categories:
These two categories serve different purposes and cater to diverse investor needs. Let’s first examine the types of equity shares, which form the backbone of most corporate structures.
How many types of shares are there? What are the advantages and disadvantages of these types of shares in a company? Let’s find out!
Equity shares, also known as ordinary shares, are the most common type of shares issued by companies. They form the core of the company’s share capital and signify true ownership. If you’re researching the types of shares available for high-risk, high-reward investments, equity shares are your go-to choice.
The types of equity shares an investor chooses depend on their financial goals, risk appetite, and interest in company management. These shares are ideal for investors focused on wealth accumulation and long-term gains.
The following are the benefits of equity shares:
Equity shares involve a huge amount of entrepreneurial risk. The greater the risk factor, the higher the return potential. The investor also enjoys the company’s profits and dividends.
Investing in equity shares is easy. With the help of a financial advisor, a shareholder can invest in the stock market. Here, investors can easily buy or sell the stock without significantly impacting its market price.
When an investor buys a company share, they also claim partial ownership. The higher the number of equity shares, the greater their power within the organization.
Here are some drawbacks of equity shares
Investors in equity shares have the last claim to company profits. The company distributes dividends first to bond and preference stakeholders and then to equity shareholders.
This means that if the company performs poorly and the profit is low, equity shareholders will have to settle for a lower amount.
Equity shares do not guarantee returns. If a company shows poor performance, its market price drops. Thus, shareholders have to sell their shares at a low price.
Preference shares are so named because they offer shareholders preferential treatment over equity shareholders regarding dividend distribution and capital repayment during liquidation. These shares usually have a fixed dividend rate and limited or no voting rights.
Understanding the types of preference shares is essential for investors who prefer stable income with lower risk exposure. Preference shares offer a solid solution for anyone analyzing the types of shares best suited for passive income.
Preference shares enable investors to receive dividend payouts without fail. Other stakeholders may receive them later. Or even worse, they may not receive them at all.
As mentioned, when the company announces it will pay dividends, preference shareholders receive them first.
Under special circumstances, they also have the right to vote. Generally, purchasing shares doesn’t give a company the right to participate in management. Thus, this only happens rarely.
Read More: How to Invest in Stock Market in India: Guide for Beginners
The benefits of preference shares are as follows:
Like equity shares, preference shares represent partial ownership in the company. However, unlike equity shareholders, preference shareholders receive a fixed dividend payout.
If the firm winds up under unfortunate circumstances, the preference stakeholders have higher claims than equity shareholders. Thus, the risk factor is low here.
Regarding dividends, preference shareholders have the advantage of receiving them first. Any other shareholder enjoys the dividend benefits after them.
These are a few disadvantages of preference shares:
Fixed dividends on preference shares become less attractive when a company earns a huge amount. They cannot take full advantage of the company’s prosperity.
Capital appreciation is the increase in the market price of an investment. Preference shareholders enjoy company profits before equity shareholders.
Convertible shares, usually preference shares, can be converted to equity shares. Companies usually fix the price at which the shares can be converted when issuing them.
The different types of convertible shares include:
The investors are obliged to convert the shares on the due date.
Here, the company can make a choice. They can convert the share to equity at the predetermined conversion price on the due date. Or they can buy the share in cash.
The investor decides whether to convert the share to equity or keep it till maturity.
Non-cumulative shares are the ones with no accumulation of dividends. This is mostly because the non-cumulative shareholders are paid from the company’s net profits from the present year. So, if the company incurs a loss in a particular year, shareholders cannot claim the outstanding dividends from its future profits.
Cumulative shares allow the shareholder to receive dividends in arrears. If a company is running at a loss and cannot pay dividends now, it is obliged to pay the cumulative dividends in the following year.
Redeemable shares are shares that companies can repurchase or claim after a fixed period. The redemption price is predetermined. The company can buy the shares back at the predetermined price range at any time.
Irredeemable shares cannot be redeemed during the company’s active lifetime. The shareholders can initiate their claim to the assets only when the company decides to wind up.
Understanding the different types of shares helps investors choose the right combination of ownership and income potential. It also ensures that you select the most appropriate types of shares for your portfolio.
Choosing between equity shares and preference shares depends on a clear understanding of personal financial objectives. Comparing the types of shares through these parameters is a necessary step for serious investors.
A Public Limited Company (PLC) can confidently issue the following main types of shares:
1. Ordinary Shares – Offer voting rights and variable dividends based on company performance.
2. Preference Shares – Provide fixed dividends, prioritized over ordinary shares, typically without voting rights.
3. Cumulative Preference Shares – Ensure any missed dividends are carried forward and paid later.
4. Redeemable Shares – Can be repurchased by the company at a future date, as agreed.
5. Non-voting Shares – Entitle holders to dividends but do not grant voting rights.
Regulation of shares ensures that companies issue, manage, and trade shares transparently, legally, and in a way that protects investors. In India, this is achieved through a combination of laws, regulatory bodies, and frameworks.
Shares are regulated under several key legislations:
Failure to follow regulations can result in:
Mastering the types of shares in India is crucial for any serious investor aiming for financial success. Equity shares deliver significant growth and ownership control, while preference shares ensure steady, prioritized dividends and lower risk. Understanding these share types allows you to tailor your investment strategy confidently, balancing risk and reward. By aligning your choices with your financial goals and market conditions, you can build a diversified, resilient portfolio that maximizes returns and secures your future wealth. Knowledge of share types is your strongest tool in the Indian investment landscape.
Shares are units of ownership in a company that can be sold and bought. Based on the shares they are investing in, investors can benefit from the company’s profits and dividends. The dividends can be received as income or reinvested to buy more shares. Depending on the type of shares, investors also get voting rights.
The different types of equity shares include:
1. Ordinary shares – Here, investors receive a fraction of company ownership based on their investment amount.
2. Participating preference shares – Investors are entitled to a stipulated amount of company shares.
3. Bonus shares – The company allocates additional shares from its earnings to the shareholders.
4. Right shares – These shares are issued to encourage premium investors to increase their stake.
In preference shares, the shareholder is entitled to a fixed dividend. When a company decides to pay out dividends, it will receive them before equity shareholders. Another advantage is that if the company decides to wind up, preference shareholders can stake a higher claim on the business’s assets.
Convertible shares are a type of share that can be converted into equity shares.
There are three types of convertible shares:
1. Mandatory – the shares automatically get converted to equity shares on or before the due date.
2. Reverse – the company can convert the shares on the due date or buy them in cash.
3. Vanilla- the investors decide whether to convert the bond or hold it till maturity.
Cumulative shares enable investors to receive missed dividends in the form of arrears. On the other hand, the company doesn’t have to compensate non-cumulative shareholders for missed dividends. Cumulative shares are often preferred over non-cumulative shares as the investors will receive the dividends that they missed later.
Different types of shares include ordinary, preference, redeemable preference, convertible preference, and treasury shares. Shares represent ownership in a company and are an essential aspect of the corporate world.
What kinds of stocks are there?
1. Growth stocks have earnings growing at a faster rate than the market average.
2. Income stocks pay dividends consistently.
3. Value stocks have a low price-to-earnings (PE) ratio, meaning they are cheaper to buy than stocks with a higher PE.
Share capital can be classified as authorised, issued, subscribed, called up, and paid-up share capital.
Equity shareholders have rights to vote in company decisions, receive dividends, participate in profit distribution, and claim residual assets during liquidation, reflecting their ownership stake in the company.
Shares are not risk-free; their value can fluctuate due to market conditions and company performance, exposing investors to potential gains as well as losses.
An IPO (Initial Public Offering) is the first sale of a company’s shares to the public, while shares represent ownership units of the company that can be bought and sold after the IPO.
Shares represent ownership in a particular company, whereas stock is a broader term indicating ownership in one or more companies. “Shares” is more specific; “stock” is more general in usage.
Redeemable Shares: Can be repurchased by the company after a fixed period at a predetermined price.
Irredeemable Shares: Cannot be redeemed during the company’s lifetime; shareholders are repaid only when the company is wound up.
They offer high return potential, ownership control, and easy trading but come with higher market and performance risks.
Authored by, Sakshi Arora
Digital Content Writer
Sakshi is a Content Creator and Strategist who specializes in crafting well-researched content across diverse topics including economics, finance, health, and more. She brings a fresh perspective to every piece she writes, always aiming to offer real value to her readers. When she’s not writing, you’ll likely find her curled up with a book—she’s a proud bookworm—or sipping on endless cups of chai, her favorite obsession.
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Chegg India does not ask for money to offer any opportunity with the company. We request you to be vigilant before sharing your personal and financial information with any third party. Beware of fraudulent activities claiming affiliation with our company and promising monetary rewards or benefits. Chegg India shall not be responsible for any losses resulting from such activities.
