Equity shares represent an ownership interest in a company. Shareholders have rights to the company’s assets and profits since they are co-owners of the company. There are many types of equity shares that offer stockholders a variety of rights and advantages. Investors must have a thorough understanding of the various forms of equity shares in order to make wise investing choices.
1. Common Shares
Common shares, also known as ordinary shares, form the largest category of shares. They represent ownership of a company and provide voting rights to shareholders. Common shareholders have a residual claim on the assets and earnings of the company after obligations towards preference shareholders, debenture holders and other debt providers are met. The market value of common shares tends to be influenced the most by company performance and prospects. Dividends paid on common shares are variable and depend on profitability.
2. Preferred Shares
Preferred shares are shares that provide certain preferential rights and privileges not enjoyed by common shareholders. Priority is given to preferred shareholders over common shareholders for dividend payments and asset distribution in the event of a liquidation. Prior to paying common shareholders, preferred share dividends are typically paid out at a set percentage of share value. As compensation for lower investment risk, the dividend rate on preferred shares is lower than interest rates on the company’s bonds.
3. Differential Voting Shares
Differential voting shares are equity shares with different voting rights compared to common equity shares. In this dual-class share structure, one class of shares has superior voting rights than the other. Typically, common shares have one vote per share while differential shares carry more than one vote per share. This allows certain shareholders like promoters to gain majority and retain control with minimal equity ownership. Differential voting shares rank equally with common shares in terms of dividends and asset distribution upon liquidation.
4. Restricted Voting Shares
Restricted voting shares have limited voting rights. The company’s charter documents may impose restrictions like barring restricted voting shareholders from voting on certain corporate matters like director elections, mergers and acquisitions etc. Their financial rights like dividends and proceeds in liquidation remain the same. Companies issue restricted voting shares to discourage hostile takeovers by reducing the voting power of acquiring shareholders.
5. Golden Shares
Golden shares contain special veto rights over specific company decisions and actions. They provide their holder special powers disproportionate to their nominal share value. The government often holds a golden share instead of majority stake to prevent sale of assets considered of national importance. Golden shares do not affect financial rights of other shareholders.
Conclusion
While ordinary common shares remain the most popular, companies can issue multiple classes of equity shares with affordable share price, varied privileges, voting rights and risk-return profiles. Preferred shares provide income investors lower risk and stable dividends. Restricted and differential voting shares allow controlling ownership with lower equity stake. Tracking shares offer focused exposure to isolated segments within a diversified company. Understanding the nuances of multiple equity share types allows investors to select instruments aligned to their investment objectives, risk appetite and desired rights.
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