Types of Shares

Types of Shares. There are two main classes of shares are ordinary and preference Ordinary shares sometimes called equity shares Those are the highest risk-takers shares in the company.

This implies that the holder s claims upon profit for dividend, and assets if the company is liquidated, are deferred to the prior rights of creditors and other security holders.

However, the capital liability of ordinary shareholders is limited to the amount they have agreed to subscribe on their shares, therefore they cannot be called upon to meet any further deficiency that the company may incur. If the ordinary shares are the voting controlling shares but in some companies the significant proportion is held by the directors and the remainder are widely held by a large number of shareholders, so the directors may effectively control the company.

Preference shares They also are the part of the equity ownership, attractive to risk-averse investors because of their fixed rate of dividend, which normally must be at a higher level than the rate of interest paid to lenders, because of the relatively greater risk of non-payment of dividend. Whilst they are part of the share capital, the holders are not normally entitled to a vote, unless the terms of issue specified overwise, and even then votes are usually only exercisable when dividends are in arrears.

Preference shareholders have prior rights to dividend before ordinary shareholders, but it may be withheld if the directors consider there are insufficient resources to meet it. There is an implied right to accumulation of dividends if they are unpaid, unless the shares are stated to be non-cumulative. Payment of such arrears has priority over future ordinary dividends. And if the company goes into liquidation, preference shareholders are not entitled to payment of dividend arrears or of capital before ordinary shareholders, unless their terms of issue provide otherwise, which they usually do. Companies have issued three varieties of preferences shares from time to time, to confer special rights these are redeemable preferences shares, participating preferences shares and convertible preferences shares.

Redeemable preferences shares are similar to loan capital in that they are repayable but they lack the advantage enjoyed by loan interest of being able to charge dividend against profit for taxation purposes, participating preferences shares enjoy the right to further share in the profit beyond their fixed dividend, normally after the ordinary shareholders have received up to a state percentage on their capital, convertible preferences shares give the option to holders to convert their shares into ordinary shares at the specified price over a specified period of time. 3.