Types of shares

 

There are several types of shares that companies can issue, each with different rights and features. The main types are:

1. Equity Shares (Common Shares)

• Most common type of share issued.

• Shareholders have voting rights.

• They receive dividends (if declared) after preference shareholders.

• They bear the highest risk in case of liquidation.

2. Preference Shares

• Holders receive a fixed dividend before equity shareholders.

• Priority is given to shareholders in liquidation.

• Usually do not carry voting rights.

• In addition

  • Cumulative Preference Shares – Unpaid dividends accumulate.

  • Non-Cumulative Preference Shares – No accumulation of unpaid dividends.

  • Convertible Preference Shares – Can be converted into equity shares.

  • Non-Convertible Preference Shares – Cannot be converted.

3. Bonus Shares

• A bonus issue of shares is the allocation of additional shares to stockholders.

• Bonus shares increase a company’s share capital but not its market capitalization.

• A bonus issue of shares is funded by a company’s earnings or share reserves.

• Bonus issues don’t dilute shareholders’ equity because they are issued in a constant ratio that keeps the relative equity of each shareholder the same as before the issue.

• Companies issue bonus shares to make their stock more attractive for retail investors, provide an alternative to a cash dividend, and/or reflect a position of financial health.

• A downside of bonus issues is the opportunity cost of earnings utilized for other purposes.

4. Rights Shares

• A rights issue is one way for a cash-strapped company to raise capital, often to pay down debt.

• Before and up to a specific expiration date, shareholders can buy new shares at a discount.

• Until that date, shareholders also may trade their rights in the open market.

• Because more shares are issued to the market, the stock price will be diluted.

• Shareholders are not obligated to purchase the additional shares.

5. Sweat Equity Shares

• Issued to employees or directors as a reward for their services or contributions (like intellectual property).

6. Employee Stock Option Plan (ESOP) Shares

• Given to employees as an incentive or part of compensation.

• Employees can buy shares at a pre-set price after a vesting period.

Here are examples of how each type can be used in real companies

1. Equity Shares – Example: Apple Inc. (AAPL)

• Usage: Apple issues equity shares to the public through stock exchanges like NASDAQ.

• Investor Rights: Shareholders have voting rights in annual general meetings (AGMs), and they benefit from capital gains and dividends.

• Risk/Reward: If Apple does well, shareholders gain; if it fails, they bear the loss.

2. Preference Shares – Example: Tata Steel (India)

• Usage: Tata Steel has issued preference shares to raise long-term capital without diluting control.

• Features: These shares offer a fixed dividend regardless of company profits and have no voting rights.

• Investor Profile: Preferred by conservative investors looking for steady income.

3. Bonus Shares – Example: Infosys (India)

• Usage: Infosys has issued bonus shares multiple times (e.g., 1:1 bonus in 2018).

• Impact: Shareholders received 1 additional share for each share they held—without paying anything.

• Benefit: Increases number of shares held, though the share price adjusts accordingly.

4. Rights Shares – Example: Reliance Industries (India)

• Usage: In 2020, Reliance issued rights shares to existing shareholders at a discounted rate.

• Purpose: Raised capital during the pandemic while giving shareholders a chance to increase their stake.

• Benefit: Shareholders could buy more shares at a lower price, or sell their rights to others.

5. Sweat Equity Shares – Example: Flipkart (India)

• Usage: In its early days, Flipkart granted sweat equity to key employees and co-founders in return for their contributions (like building the platform and tech infrastructure).

• Purpose: Rewarded talent and effort without upfront salary costs.

• Benefit: As Flipkart grew and was later acquired by Walmart, these shares became highly valuable, turning early team members into millionaires.

6. ESOP Shares – Example: Google (Alphabet Inc.)

• Usage: Google offers ESOPs to employees, giving them the option to buy company shares at a fixed price after a certain period.

• Vesting: Typically over 4 years, encouraging employees to stay and contribute long-term.

• Benefit: When share prices rise, employees profit from the difference, making it a powerful retention and motivation tool.

These types of shares help startups and large firms attract, reward, and retain top talent, aligning employee interest with company success.