A share can be defined as the unit of capital structure of a company allocated to an individual. It is the financial security with a limited liability company that raises capital from the public.
A share is the individual portion of the company’s capital owned by the shareholders. They are given a certificate called a share certificate. A share has a normal value which is also called par value but the real value or market value depends on how much people are willing to pay to obtain the share in the market.
A shareholder is a person that purchases shares in a limited liability company which is one of the owners of the company.
Types of Shares:
1. Ordinary Shares:
These are equity shares that are usually issued when a company is newly formed. Ordinary shareholders are the real owners of the business, the risk bearers, they have no fixed rate of dividend.
The holders have the last claims to the distributed profits and receive their dividends only after all the other shareholders must have been fully settled and relevant expenses and charges are met.
They bear the major risk of the business because they are the owners of the business. Ordinary shares are also known as equities.
Types of Ordinary Shares:
(a) Deferred Ordinary Shares: They are the last claims to dividend. If there is a loss in the company they may not be paid. If there is a declaration of profit they are paid after all other types of shareholders have been paid.
The differed ordinary share is issued to the founders of the business and is also called Founder’s Shares. The holders are the founder members of the company. The promoters or the floaters incurred expenses to the process of the company. These shareholders are usually accompanied by some rights and privileges such as voting right on particular issues.
(b) Preferred Ordinary Shares: They are given preference over other types of shares. The Preferred holders are the first claims to distributed profit (dividend) after preference shareholders might have been paid.
Features of Ordinary Shares:
i. They bear the major risk.
ii. They are the owners of the business.
iii. They are paid dividends after other shareholders.
iv. They don’t have a specific dividend rate.
v. They are major decisions makers.
vi. They have voting rights to vote and be voted for.
2. Preference Shares:
Preference shareholders are the holders that have the first claims of the company’s distributed profit (fixed rate of dividend) from the total profit of the company. They have limited rights and bear little or no risk. They enjoy preferential treatment and are also given preference in the repayment of capital in the event of the company folding up.
Types of Preference Shares:
(a) Cumulative Preference Shares: Cumulative preference shareholders have the right to arrears of dividends. If the company fails to pay at the end of the preceding account year, the arrears are accumulated and carried forward until they are fully paid. This is why they are called cumulative shares. Holders of these shares have a fixed rate of dividend.
(b) Participating Preference Shares: Holders of these shares, participate in the sharing of profit after ordinary shareholders have received their dividend. They are entitled to preference dividend at a specified rate and participate in the remaining profit.
(c) Redeemable Preference Shares: These holders differ from other preference shareholders. The owners of the company can retrieve or buy the back at later date the shares after a fixed period of time. Redeemable shares are the shares the company can purchase from the Shareholders. It is the shares that are issued with the intention that the shares shall be redeemed or paid later.
(d) Non-cumulative Preference Shares: This is the opposite of the cumulative preference shares. Issuing companies are not obligated to pay the stockholders any unpaid or omitted dividends.
Features of Preferences Shares:
1. They have limited rights in the important issues and formulation of the business.
2. For redeemable shares it can be paid for later.
3. The shareholders have preference over other investors.
4. They have claims to distributed profit.
5. They can make decisions and policies for the business.
6. They are given a fixed rate of dividend.