Types of Shares: A Guide to Understanding Different Shares

Shares are the building blocks of any company listed in the stock market. When you buy a share, you’re essentially buying a small part of the company, which entitles you to a proportionate share of the company’s profits and assets. Understanding the different types of shares is essential for investors to make informed decisions and to select investments that align with their financial goals. This article will explore the various types of shares available to investors.

1. Equity Shares (Common Shares)

Equity or ordinary shares are the most common form of shares traded on the stock market. When you purchase equity shares, you become a part-owner of the company. These shares give you voting rights in company decisions, such as electing the board of directors or approving mergers and acquisitions.

• Dividends: Equity shareholders are entitled to dividends, though the amount is not guaranteed and depends on the company’s profits.
• Risk: These shares carry a higher level of risk since shareholders are paid after debtors and preferred shareholders in case the company goes bankrupt.
• Return Potential: Equity shares have the potential for high returns due to capital appreciation, but they also come with significant risks.

For more detailed information about equity shares, check out this guide on equity shares.

2. Preference Shares

Preference shares (or preferred stock) are another common type of shares. These shares are considered less risky than equity shares because preferred shareholders are given priority over equity shareholders in the payment of dividends and during liquidation.

• Dividends: The dividend rate for preference shares is fixed, which can be attractive to income-focused investors.
• Risk: Though the risk is lower compared to equity shares, these shares still do not carry voting rights, and their value may fluctuate depending on company performance.
• Preference: In the event of liquidation, preference shareholders are paid before equity shareholders, making them a relatively safer investment.

3. Deferred Shares

Deferred shares are shares that do not pay dividends until a certain condition is met, often after dividends are paid to other classes of shares. These shares are primarily issued to the company’s promoters or founders.

• Returns: Deferred shareholders may only receive dividends once the company reaches certain profit thresholds.
• Risk: These shares carry high risks as the potential returns are uncertain.

4. Convertible Shares

Convertible shares allow investors to convert their preference shares or debentures into company equity shares after a predetermined period. This will enable investors to benefit from the company’s growth if they convert their shares into equity.

• Advantages: They offer fixed returns through dividends, with the option of converting them into equity shares if the company performs well.
• Risk: The value may decrease if the company’s performance declines or if conversion is not beneficial.

5. Redeemable Shares

Redeemable shares can be repurchased (redeemed) by the issuing company after a certain period. They usually pay a fixed dividend and have a maturity period.

• Return: These shares provide regular income via fixed dividends until redemption.
• Risk: The company can redeem the shares earlier than expected, which might limit the potential for higher returns.

6. Bonus Shares

Bonus shares are additional shares issued by a company to its current shareholders free of charge based on the number of shares they already own. Companies issue bonus shares to reward existing investors without paying cash dividends.

• Advantage: Bonus shares can increase an investor’s total number of shares, potentially increasing their overall stake in the company.
• Impact on Value: Although investors receive additional shares, the overall value of their holdings remains the same since the company’s total market capitalisation remains unchanged.

7. Growth Shares

Growth shares represent companies expected to grow above average compared to other companies. These companies reinvest profits into the business rather than paying dividends, which helps fuel further growth.

• Return Potential: These shares have the potential for significant capital appreciation.
• Risk: They come with higher risks depending on the company’s growth and market conditions.

Conclusion:

Understanding the different types of shares helps you make better investment decisions. Whether you’re looking for steady income, long-term capital growth, or a combination of both, there’s a share type that suits your needs. Remember to evaluate your risk tolerance and financial goals when choosing the type of shares to invest in.

For more insight into share investments, read our article on IPO Flipping and learn about investment opportunities in the IPO market.

FAQs on Types of Shares:

Q1. What is the difference between equity shares and preference shares?

• Answer: Equity shares provide ownership in the company and offer voting rights, while preference shares offer priority in dividend payments and liquidation but do not come with voting rights.

Q2. Can preference shares be converted into equity shares?

• Answer: Yes, convertible preference shares allow investors to convert their preference shares into equity shares after a specified period.

Q3. Are bonus shares taxable?

• Answer: Bonus shares are not taxed at issuance, but when sold, the capital gains tax applies based on the holding period and the profit made.

Q4. What are the risks of investing in equity shares?

• Answer: Equity shares carry higher risks depending on the company’s performance and market conditions. Shareholders are paid last in case of bankruptcy, and dividends are not guaranteed.

Q5. How can I choose between different types of shares?

• Answer: The choice of shares depends on your investment goals, risk tolerance, and income requirements. Preference shares might be suitable for income-seeking investors, while equity shares are better for those looking for growth potential.