What are the Different Types of Shares 

When investing in the stock market, understanding the types of shares is crucial for making informed investment decisions. Shares represent ownership in a company and provide investors with certain rights, such as voting and dividend income. Companies issue different types of shares to meet their capital requirements, each offering different benefits to investors.

This guide will break down the various types of shares, their features, and their importance.

What Are Shares?

Shares, also known as stocks, signify ownership in a company. When you buy shares, you become a shareholder, meaning you own a portion of the company. Companies issue shares to raise capital for expansion, operations, or debt repayment. Shares can be broadly classified into equity shares and preference shares.

Types of Shares in India

Shares are primarily divided into two categories:

1. Equity Shares (Common Shares)
2. Preference Shares

Let’s explore each in detail.

A. Equity Shares (Common Shares)

Equity shares, also known as ordinary shares, are the most common type of shares issued by companies. These shares provide ownership rights to investors and entitle them to vote in key company decisions. However, equity shareholders receive dividends only after preference shareholders are paid.

Features of Equity Shares:

• Voting rights in company matters
• Dividends depend on company profits
• Higher risk but the potential for high returns
• Can be easily traded in the stock market

Shareholders of equity shares have voting rights in company decisions and earn returns in the form of dividends and capital appreciation. However, they bear the highest risk as they are the last to receive payouts in case of liquidation.

Types of Common shares 

1. Authorized Shares

Authorized shares refer to the maximum number of shares a company is legally allowed to issue as per its Articles of Association (AoA). This number can be increased after approval from shareholders and regulatory bodies.

Example: If a company has 1 million authorized shares but has only issued 600,000 shares, it still has 400,000 shares available for future issuance.

2. Issued Shares

Issued shares are the portion of authorized shares that a company has allocated for sale to investors, including the public, institutions, or promoters.

Example: 600,000 issued shares represent the number of shares that investors can collectively subscribe to.

3. Subscribed Shares

Subscribed shares are those issued shares that investors have agreed to purchase. This means these shares are now owned by investors.

Example: A company issues 600,000 shares, but only 550,000 are subscribed—meaning 50,000 shares remain unsold and 550,000 are purchased.

4. Paid-up Shares

Paid-up shares are the portion of subscribed shares for which investors have fully paid. Since most shares in modern companies are fully paid at issuance, paid-up capital often matches subscribed capital.

Example: If investors have fully paid for 550,000 shares, then the paid-up capital is equivalent to the subscribed capital.

5. Bonus Shares

Bonus shares are additional shares given to existing shareholders from the company’s retained earnings. These shares are issued instead of cash dividends to reward shareholders.

Example: A company declares a 1:2 bonus issue, meaning that for every two shares a shareholder owns, they receive one additional share for free.

Read Also: When Bonus Shares Are Credited in Demat Account?

6. Rights Shares

Rights shares are issued to existing shareholders at a discounted price before being offered to the general public. This allows shareholders to maintain their ownership percentage in the company.

Example: A company offers 1 rights share for every 5 shares held at a discounted price.

7. Sweat Equity Shares

Sweat equity shares are issued to employees or directors as a reward for their contribution, typically for non-cash services such as expertise, innovation, or patents.

Example: A tech startup rewards an employee with 1,000 sweat equity shares for developing proprietary software.

8. Voting & Non-Voting Shares

Voting shares have voting rights that allow shareholders to vote on company matters.

Non-voting shares grant ownership stake but no voting rights. These are often given to employees or strategic investors.

Example: A company may issue non-voting equity shares to investors who only seek dividends and capital gains.

9. Convertible & Non-Convertible Shares

Convertible shares allow shareholders to convert them into preference shares or another class of equity after a certain period.

Non-convertible shares cannot be converted into any other type of stock.

Example: Convertible equity shares in a startup may turn into preference shares if specific financial targets are met.

10. Preference Shares

Preference shares, as the name suggests, offer shareholders preference over equity shareholders. These shareholders receive dividends before equity shareholders and have a higher claim on the company’s assets in case of liquidation. However, preference shareholders generally do not have voting rights.

Features of Preference Shares

• Regular dividend payments
• Lower risk compared to equity shares
• No voting rights in most cases
• Priority over equity shareholders on company assets

Types of Preference Shares

Preference shares are a hybrid between equity and debt. They provide fixed dividends (similar to coupon payments of bonds) and have the potential to provide capital appreciation (similar to equity). They have priority over equity shares in dividends but usually do not carry voting rights.

1. Cumulative Preference Shares

Cumulative preference shares allow unpaid dividends to accumulate and be paid later when the company becomes profitable.

Example: If a company skips a ₹5 dividend payout in Year 1, it must pay ₹10 in Year 2 (₹5 for Year 1 + ₹5 for Year 2).

2. Non-Cumulative Preference Shares

Non-cumulative preference shares do not give unpaid dividends of previous years. If the company fails to pay dividends in a particular year, shareholders don’t get that dividend in the following years.

Example: If the company didn’t pay dividends in 2024, shareholders cannot claim them in 2025 and afterward.

3. Participating Preference Shares

Participating preference shareholders receive fixed dividends under normal circumstances but have a claim on the company’s excess earnings if the company makes excess profits.

Example: If the company generates excess profit, a percentage of that profit is paid to these shareholders in addition to the fixed dividend.

4. Non-Participating Preference Shares

Non-participating preference shareholders only receive the fixed dividend and do not get extra dividends, even if the company performs exceptionally well.

Example: A non-participating preference shareholder receives only a fixed dividend, regardless of the company’s additional profits.

5. Convertible Preference Shares

Convertible preference shares can be converted into equity shares after a certain period.

Example: A preference shareholder gets the option to convert their shares into equity shares after 5 years.

6. Non-Convertible Preference Shares

Non-convertible preference shares cannot be converted into equity shares and remain preference shares.

Example: Investors holding non-convertible shares can only sell them to others and cannot convert them into equity shares.

7. Redeemable Preference Shares

Redeemable preference shares can be bought back by the company at the maturity date at a predetermined price.

Example: A company issues redeemable shares at ₹100 per share, with a buyback price of ₹120 after 5 years.

8. Irredeemable Preference Shares

Irredeemable preference shares do not have a redemption date and can be held by investors indefinitely.

Example: Investors continue to receive fixed dividends without a repurchase obligation from the company.

9. Adjustable-Rate Preference Shares

The dividend rate on adjustable-rate preference shares changes based on benchmark interest rates or other financial indicators.

Example: If inflation rises, adjustable-rate shares may increase dividends from 6% to 7%.

Key Differences Between Equity and Preference Shares

Feature	Equity Shares	Preference Shares
Dividend Payment	Variable, based on profit	Fixed
Voting Rights	Yes	No, in most cases
Risk Level	High	Lower
Convertibility	Non-convertible	Convertible (in some cases)
Liquidation Preference	Last claim on assets	Higher claim than equity shareholders

Why Understanding Share Types is Important for Investors

Choosing between equity and preference shares depends on your risk appetite, investment goals, and expected returns. Here’s why understanding different types of shares matters:

• Risk Management: Helps in selecting stocks based on risk tolerance.
• Portfolio Diversification: Mixing equity and preference shares while building your portfolio can balance risk and returns.
• Dividend Strategy: Preference shares are better for steady income, whereas equity shares can provide higher growth.
• Voting Rights: Investors who want voting rights in company matters should opt for equity shares.

Conclusion

Understanding the types of shares is essential for making sound investment decisions. Equity shares offer higher returns but come with greater risks, while preference shares provide stable income in the form of dividends with lower risks. Depending on your financial goals, you can choose a mix of both to build a balanced portfolio.

Before investing, always conduct thorough research and, if needed, consult a financial advisor for expert guidance.

Frequently Asked Questions (FAQs)