What Are Shares?
Introduction:- A share may be termed as the interest of the shareholder in a definite portion of capital in the business. It defines the relation between the company and shareholder. Shareholders are the real owners of the company, but they do not own the company’s assets as they belong only to the company because company is a separate legal entity. Therefore, the shareholders ownership is represented by the shares in the company.
Meaning of Shares:- A share is the interest of shareholder in terms of money in the business represented as a liability on the company. In the words of Justice Farewell, “The interest of a shareholder in the company measured, by a sum of money for the purpose of liability in the first place, and the interest (dividend) the second, but also consisting of various covenants entered into by the shareholder inter se.”
Characteristics of Shares:-
1. The property or the assets of the company does not belong to the shareholders.
2. Shares are transferable. Shareholder can transfer its shares to any person of their like, for cash or kind.
3. Shares are goods.
Types of Shares:-
Mainly there are two types of Shares:-
1. Equity Shares:- (a) With Voting Rights
(b) With differential rights as to dividend, voting or otherwise.
2. Preference Shares:- (a) Cumulative and Non-Cumulative Preference Shares
(b) Participating and Non-Participating Preference Shares
(c) Redeemable and Irredeemable Preference Shares
(d) Convertible and Non-Convertible Preference Shares
1. Equity Shares:- Equity Shares are also termed as ordinary shares. Shareholders holding equity shares have the residual right of the company. They may get higher dividends than the preference shareholders or may get nothing depending on the profit remained after paying all the expenses and dividend to shareholders. The share holders holding equity shares are also termed as residual claimants. It is the risk bearing capital of the company.
2. Preference Shares:- Preference Shares are those shares which satisfies the following two conditions:-
(a) The preference shareholders have the preferential rights with regard to the payment of dividend at fixed rate.
(b) The preference shareholders have the preferential right with regard to the return of the capital.
Types of Preference Shares:-
1. Cumulative and Non-Cumulative Preference Shares:- The holders of the cumulative preference shareholders have the right to claim the unpaid dividend either of the current year or previous years, whether the company has earned profits or not.
On the other hand, non-cumulative preference shareholders are paid dividend only in case the company has earned the sufficient profits. In case of loss, they cannot claim for the dividend either of the current or previous year.
2. Participating and Non-Participating Preference Shares:- The holders of the participating preference shares have the right to claim for the dividend in addition to their fixed dividend on the surplus profits, which remains after meeting the claims of equity shareholders. The surplus profit is shared between preference and equity shareholders in an agreed ratio.
On the other hand, the holders of the non-participating shares are entitled to only fix rate of dividend. They cannot claim for a part in surplus profits of the company.
3. Redeemable And Irredeemable Preference Shares:- Redeemable preference shares are those shares which can be redeemed from the shareholders after a fixed period of time by making payment to them. But the company must be authorised by its Articles of Association.
On the other hand, Irredeemable Preference Shares cannot be redeemed from the shareholders during the life span as the Articles of Association does not authorise them.
4. Convertible and Non-Convertible Preference Shares:- Convertible Preference Shares are those shares which can be easily converted into equity shares any time. On the other hand, Non-Convertible Preference shares are those shares which do not have the option of their conversion into the equity shares.