Shares are units of ownership title in a company or commercial asset that gives for an equal division in case any profits, if any are registered, in the form of dividends. The two main types of shares are common shares and preferred shares.
Common Shares
Common shares are the most common form of equity and represent an ownership interest in the Company. Common shareholders have a residual claim (i.e., they can claim only after the claims of debt-holders and preferred stockholders) on firm assets if the firm is liquidated and govern the corporation through voting rights. Firms are under no compulsion to pay dividends on common equity; the firm based on profit determines what dividend will be paid periodically. Common stockholders can vote for the resolution that affects the shareholder’s interest in the Company like important merger decisions, the selection of auditors, appointment of directors, etc.. If they are unable to attend the yearly meeting, shareholders can vote by proxy authorizing someone else to vote on his or her behalf.
Common shares can be divided into two types:-
Callable common shares give the company the right to re-buy the stock at a pre-specified call value. Investors get a fixed amount when the company calls the stock. The call feature profits the company because when the stock’s market price is higher than the call price, the company can call the shares and again re-issue them later at a greater price. Calling the shares, likewise to the repurchase of shares, allows the company to lessen its dividend payments without altering its per-share dividend portion.
Putable common shares grant the stockholder the right to sell the shares back to the company at a specific value. A put option on the shares profits the shareholder because it efficiently places a floor supporting the share value. Stockholders pay for the put option as other things equal, putable shares are sold for greater prices than non-putable shares and establish more capital for the company when they are issued.
Preference shares
Preference shares also called the preferred stock, has features of both debt and common stock. As with common share, preferred share dividends are not a contractual compulsion, the shares generally don’t mature, and the stock can have put or call features. Similar to debt, preferred shares usually make fixed periodic payments to investors in the form of dividend and do not typically have voting rights.
Cumulative preference shares: The cumulative preference are generally promised fixed dividends, and if any dividends are not paid, they must be cleared before common shareholders receive dividends.
Non- Cumulative preference shares: Dividends of non-cumulative preference shares can not accumulate over time if they are not given, but dividends for any period must be cleared before common shareholders get dividends.
The preferred shares have a stated par value and pay a percentage dividend based on the par value of the shares. Participating investors of preference shares receive extra dividends if company profits surpass a predetermined level and may receive a value higher than the par value of the preferred stock incase the company is liquidated. Non-participating preference shares holders have a claim equal to par value in the event of liquidation, but they do not share in company profits. Smaller and riskier businesses whose investors may be worried about the company’s future often issue participating preferred stock so that the investors get a share in the upside potential of the company.
Convertible preference shares: The Convertible preference shares are those shares that can be exchanged for common stock at a pre-determined conversion ratio. It has the following advantages:
- The preferred dividend is greater than a common dividend.
- If the company is profitable, the investor can share in the profits by converting his shares into common stock.
- The conversion option becomes more worthy when the common stock price increases.
- Preferred shares have less risky than common shares because its dividend is stable, and they get a priority over common stock while receiving dividends and in the event of liquidation of the company.
Because of their upside potential, the convertible preferred shares are often used to finance private equity firms and risky venture capital. The conversion feature compensates investors for the additional risk they take when investing in such firms.