Types of Shares in the Stock Market

Types of shares

The total capital of the company is divided into small units. Each such unit is called shares. It represents ownership in a company. There are mainly three types of shares: Ordinary Equity Shares, Preference Shares, and DVR (Differential Voting Rights) Shares.

Preference Shares

As the name itself suggests preference, the shareholders holding preference shares get preference over equity shareholders regarding two things.

1. Payment of Dividend. They have a right to receive dividends at a fixed rate before any dividend is paid on the equity shares
2. Preference is for repayment. When the company is wound up or in a liquidation event, they have a right to capital return before equity shares.

The minimum investment in preference shares is Rs 10 lakh and is usually offered through private placement. The Preference Shares are further categorized into the following types:

1. Cumulative Preference Shares: In the case of cumulative preference shares, the shareholders get a fixed rate of dividend. Such a dividend is payable even out of future profit if the current year’s profit is insufficient for the purpose. The dividend on these shares keeps on accumulating unless it is fully paid.
2. Non-cumulative preference shares: In the case of non-cumulative preference shares, the shareholders get a fixed amount of dividend out of each year’s profits. In case no dividend is declared in a year due to any reason, shareholders cannot claim such dividend for that year and are not entitled to arrears of dividend in the future.
3. Redeemable preference shares. Such shares will be redeemed or buyback by the company within a stipulated period in accordance with the terms of the issue and the fulfillment of certain conditions. According to the Companies Act, 2013, all preference shares must be redeemed within 20 years.
4. Non-redeemable Preference shares. Such shares are those the capital of which cannot be redeemed or refunded before winding up. Non-redeemable preference shares are not allowed in India.
5. Convertible Preference Shares. According to the terms of issue, the holders of such shares carry a right to get their preference shares convertible into equity shares after a stipulated period.
6. Non-convertible preference shares. The shareholders do not have a right to get their preference shares convertible into equity shares.
7. Participating Preference Shares: These shares carry a right to participate in the surplus profits, if any, after dividend at a stipulated rate has been paid to equity shareholders. In the event of winding up, they are also entitled to receive a pre-determined proportion of surplus, if some surplus left after paying back to the preference and equity shareholders.
8. Non-participating preference shares. These shares do not carry a right to participate in the surplus profits or in any surplus on winding up and get only a fixed rate of dividend at the end of every year.

Equity Shares

Equity shares are the ordinary shares in which the dividend depends on the dividend policy and the availability of profits after satisfying the rights of preference shareholders. They will get dividends only when profits are left after paying a fixed rate of dividends to the preference shareholders. They have voting rights (1 share = 1 voting right) in electing the board of directors and during mergers and acquisitions of other companies. The equity shareholders become owners of the company and get the right to participate in the company’s management.

Differential Voting Rights (DVR) Shares

DVR shares are those shares where the investors get differential voting rights. The voting rights may be more or less. In India, more voting rights are not allowed on DVR shares. It is less popular in India due to a lack of awareness. The DVR shares are also listed on the stock exchanges and traded like ordinary equity shares. The price of DVR shares traded on the stock exchanges is 20-40% or even less than ordinary shares.

The companies want to keep low voting power to raise external capital without losing control of the management’s decision powers by the promoters. Due to less voting rights, the price of DVR shares is also less than the ordinary shares. The companies paid 5-10% more dividend on DVR shares to compensate for low voting power than ordinary shares, and it keeps fluctuating every year. It is very difficult to issue DVR shares due to SEBI’s strict norms and restrictions, and there are only 4 companies that have issued DVR shares. Tata Motors, Future Enterprises, Gujarat NRE Coke, and Jain Irrigation Systems Ltd have issued their DVR shares. Tata Motors is the first company to issue DVR shares in 2008. There is always a risk for high volume trades as you may not get enough buyers or sellers to buy or sell DVR shares.

Also Read:

• Private Placement
• Dividend: Meaning and Examples
• Dividend Yield