The capital of a company is divided into small equal units of a finite number and each unit is called a share. Equity is a share in the ownership of a company. It represents a claim on the company’s assets and earnings.
Generally, companies issue more than one type of share to the public namely Preference shares and Equity shares.
Preferences Share as the name suggested, it has certain preferences as compared to other types of shares. The main preferences of these shareholders over others, in brief, are as under:-
- The first preference is for compensation of dividend. Whenever the company distributes profits, the dividend is first paid on preferences share capital.
- In case of winding up the company, the preferences shareholders have a prior right in regard to repayments of capital.
Classes of Preference shares
The main types of preference shares are as under:-
- Cumulative preference shares. In this type of preference share, dividends were paid also for those years in which no profit is earned. Whenever the company declares profits, the cumulative preference shares are paid dividend for all the previous years in which dividend could not be declared.
- Non-cumulative preference shares. In this type of preference shares, the holders do not have any claim regarding amount outstanding of the dividend. They are paid dividend if a company earns the profit.
- Convertible preference shares. The convertible preference shares are those which the holders can convert into equity shares at a specified period of time. The right of conversion is to be authorized by the Articles of Associations of the company.
Equity shares are also called ordinary shares. These are the most common type of shares in which the majority of investors invest. These types of shares are actively traded in secondary or stock market. The holders of equity shares are the real owners of a company. The ordinary shareholders have voting rights in the meetings of the company. They are entitled to receive dividend as are declared by the board of directors. The dividend on equity shares is not fixed and it may vary from year to year depending upon the amount of profits available for distribution. The dividend on equity shares is only paid after satisfying the dividend right of preference shareholders. The equity share capital cannot be redeemed during the lifetime of the company.