Types of Shares

Introduction

In the world of finance and investing, shares represent one of the most important building blocks. When an individual or institution buys a share, they are essentially purchasing a small unit of ownership in a company. Shares give investors the right to participate in the profits of the company, attend shareholder meetings, and in some cases, vote on critical business decisions.

For companies, issuing shares is a powerful way to raise funds for growth, expansion, research, or debt repayment. Instead of borrowing from banks, businesses can invite the public to invest by offering shares.

However, not all shares are the same. There are different types of shares—each carrying its own rights, responsibilities, and advantages for both the company and the shareholder. Understanding these types is critical for investors, traders, and business owners.

This detailed discussion explores the various types of shares from multiple perspectives—legal, financial, and practical—while also examining their role in India’s corporate structure and the global financial markets.

What is a Share?

A share is the basic unit into which the capital of a company is divided. It represents fractional ownership in the company. If a company has issued 1,00,000 shares and an investor owns 10,000 shares, they effectively own 10% of the company.

Each share has a face value (original issue price), a market value (price at which it trades), and may provide benefits such as:

Dividends: A share in profits distributed to shareholders.

Voting rights: Power to influence company policies and decisions.

Capital appreciation: Increase in the share price over time.

Broad Classification of Shares

In corporate law, especially under the Companies Act, 2013 (India) and globally under common corporate structures, shares are classified into two major categories:

Equity Shares (Ordinary Shares)

Preference Shares

Let us break these down in detail.

1. Equity Shares
Meaning

Equity shares are the most common type of shares issued by a company. They represent ownership with voting rights and entitle holders to dividends, though dividends are not guaranteed. Equity shareholders bear the highest risk but also enjoy highest rewards in terms of capital appreciation.

Features of Equity Shares

Voting rights in company matters.

Dividend depends on profits and company policies.

Higher risk compared to preference shares.

Residual claim in case of liquidation (paid after creditors and preference shareholders).

Types of Equity Shares

Equity shares can further be divided into subcategories:

(a) Based on Rights

Voting Equity Shares – Normal shares with voting power.

Non-Voting Equity Shares – Shares that do not carry voting rights but may offer higher dividends.

(b) Based on Convertibility

Convertible Equity Shares – Can be converted into another type of security like debentures or preference shares after a specific period.

Non-Convertible Equity Shares – Cannot be converted into any other security.

(c) Based on Dividend Rights

Bonus Shares – Issued free of cost to existing shareholders from accumulated profits.

Rights Shares – Offered to existing shareholders at a discounted price before going to the public.

(d) Based on Listing

Listed Equity Shares – Traded on recognized stock exchanges such as NSE, BSE.

Unlisted Equity Shares – Not traded on stock exchanges; often held privately.

2. Preference Shares
Meaning

Preference shares are a special type of share that gives shareholders a priority claim over dividends and assets in case of liquidation. They are called "preference" because they enjoy preference over equity shares in two key respects:

Dividend distribution

Repayment of capital during liquidation

However, preference shareholders usually do not have voting rights, except in special cases (like non-payment of dividend).

Features of Preference Shares

Fixed dividend rate.

Preference in dividend payment and repayment.

Limited or no voting rights.

Considered safer than equity shares but with limited growth potential.

Types of Preference Shares

Cumulative Preference Shares

If the company cannot pay dividends in a particular year, the unpaid dividend is carried forward to future years.

Non-Cumulative Preference Shares

If the company misses dividend payments, shareholders cannot claim them in the future.

Participating Preference Shares

Allow holders to receive additional dividends if the company makes excess profits.

Non-Participating Preference Shares

Holders receive only a fixed dividend and no share in surplus profits.

Convertible Preference Shares

Can be converted into equity shares after a specific period.

Non-Convertible Preference Shares

Cannot be converted into equity shares.

Redeemable Preference Shares

Can be bought back (redeemed) by the company after a fixed period.

Irredeemable Preference Shares

Cannot be redeemed during the lifetime of the company (rare in practice due to regulations).

Other Types of Shares in Practice

Apart from the primary division between equity and preference shares, companies and markets recognize various special categories of shares:

1. Bonus Shares

Issued free of cost to existing shareholders in proportion to their holdings. For example, a 1:1 bonus issue means one extra share for every share held.

2. Rights Shares

Offered to existing shareholders at a discounted price to raise fresh capital without involving outsiders.

3. Sweat Equity Shares

Issued to employees or directors at a discount or for non-cash consideration, as a reward for their contribution to the company.

4. Treasury Shares

Shares that were issued and later bought back by the company, held in its treasury.

5. DVR (Differential Voting Right) Shares

Shares with different voting rights compared to ordinary equity shares. Example: Tata Motors issued DVR shares in India.

Global Classification of Shares

In international markets, shares may also be classified as:

Common Stock – Equivalent to equity shares in India.

Preferred Stock – Equivalent to preference shares.

Class A, B, C Shares – Different classes with varying voting powers and dividend rights (e.g., Google/Alphabet issues Class A, B, C shares).

Legal & Regulatory Framework (India)

In India, shares are governed by:

Companies Act, 2013

SEBI (Securities and Exchange Board of India) regulations

Stock Exchange Rules (NSE, BSE)

The law specifies:

Companies can issue only two main classes: Equity and Preference.

Special variations (like DVR, sweat equity, bonus, rights) must comply with SEBI guidelines.

Importance of Different Types of Shares
For Companies:

Equity shares help raise permanent capital.

Preference shares provide flexible funding without diluting voting control.

Rights/bonus shares help reward and retain existing investors.

For Investors:

Equity shares provide growth and voting rights.

Preference shares provide stable income with lower risk.

DVRs allow participation with limited voting burden.

Advantages & Disadvantages
Equity Shares

✅ Potential for high returns
✅ Voting rights
❌ High risk during market downturns
❌ No fixed income

Preference Shares

✅ Fixed dividend
✅ Safer than equity
❌ Limited upside potential
❌ No major voting rights

Real-Life Examples

Reliance Industries issues equity shares traded on NSE/BSE.

Tata Motors has issued DVR shares in India.

Infosys rewarded employees with sweat equity shares.

Globally, Alphabet (Google) issues Class A (1 vote/share), Class B (10 votes/share), and Class C (no voting rights) shares.

Conclusion

Shares are not just financial instruments—they are a reflection of ownership, risk-taking, and reward-sharing in a company. From equity shares that drive growth and risk, to preference shares that balance safety and income, and special categories like bonus, rights, DVR, and sweat equity, every type of share has a purpose.

For investors, understanding these types allows better portfolio choices. For companies, it ensures effective fundraising and governance.

In short, shares are the foundation of modern capital markets, enabling wealth creation, corporate growth, and economic development.