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2.2.1. Types of Shares
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Today, we'll discuss Equity Shares. Who can tell me what an equity share is?
I think equity shares are the common shares issued by a company, right?
Exactly! Equity shares do not have a fixed dividend. The dividends vary based on the profits of the company. Can anyone explain what that means?
It means that if the company doesn't make a profit, we might not get any dividends at all!
Correct! And since there’s no guarantee of receiving a fixed amount, this can be riskier. But it also allows shareholders to vote in company decisions, which is a crucial part of their ownership.
Does this mean equity shareholders have more risk compared to preference shareholders?
Yes, and that's a great segue to our next topic! Let's summarize Equity Shares: they have no fixed dividend and holders can vote, but they face higher risks.
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Now, let's move on to Preference Shares. Student_4, could you share what you know about them?
Preference shares have a fixed rate of dividend, right?
That's correct! Unlike equity shares, preference shareholders receive dividends before equity shareholders. What happens if the company faces liquidation?
Preference shareholders get paid before equity shareholders!
Exactly! Preference shares are less risky in that sense. However, they usually do not have voting rights. Let's summarize: Preference Shares provide fixed dividends and priority in payments.
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Create a free accountMoving on to some basic terms related to shares, starting with Face Value. What do you think it represents?
Isn't it the value printed on the share certificate?
Right! It’s the original value. Now, what about Issue Price?
It can be at par, premium, or discount. So, if a share has a face value of ₹10, it might be issued at ₹12, which means it's at a premium.
Great example, Student_3! This leads us to 'Calls'. What do you understand by calls?
Calls are amounts that shareholders need to pay in installments, like when you apply for shares.
Exactly! They can be in stages such as Application, Allotment, First Call, and Final Call. Let’s recap: Face Value is the printed value, Issue Price can vary, and Calls are installment payments.
Overview
Short Summary
This section covers the various types of shares in a joint stock company, focusing on Equity and Preference Shares, as well as basic terms related to share issuance.
Medium Summary
In this section, we explore the two main types of shares issued by joint stock companies: Equity Shares, which do not guarantee fixed dividends, and Preference Shares, which offer fixed dividends and priority in payments. Basic terms such as Face Value and Issue Price are also discussed.
Detailed Summary
Types of Shares in Joint Stock Companies
This section discusses the two primary types of shares that a joint stock company can issue: Equity Shares and Preference Shares.
- Equity Shares: These shares do not carry a fixed dividend; instead, dividends depend on the company's profitability. Shareholders are entitled to vote at company meetings.
- Preference Shares: These shares provide a fixed rate of dividend that must be paid before any dividends are paid to equity shareholders. They have priority in receiving dividends and also in the event of liquidation.
Basic Terms Involved in Shares
- Face Value: The nominal value of a share as defined in the company's articles - it's the value stated on the share certificate.
- Issue Price: The price at which shares are offered to investors, which may be at par (equal to face value), at a premium (above face value), or at a discount (below face value).
- Calls: Payments that are made by shareholders in installments. The different stages include Application, Allotment, First Call, and Final Call.
By understanding the types of shares, students will better grasp the foundational elements of equity financing and how joint stock companies manage shareholder capital.
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Create a free account• Equity Shares: No fixed dividend. Dividend varies based on profit.
Detailed Explanation
Equity shares represent ownership in a company. Unlike traditional investments that pay a fixed return, equity shareholders receive dividends that depend on the company’s earnings. If the company does well and makes a profit, shareholders may receive a higher dividend; if it does poorly, the dividend may be lower or not be paid at all.
Examples & Analogies
Imagine investing in a lemonade stand operated by your friend. You agree that if the stand makes good profits on a hot summer day, you will get a bigger share of the earnings. However, if the stand doesn't sell many lemonade cups or even incurs losses, you may receive less or nothing at all. This is like equity shares where dividends fluctuate based on company performance.
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Create a free account• Preference Shares: Fixed rate of dividend and priority in payment over equity shareholders.
Detailed Explanation
Preference shares provide shareholders with a fixed dividend, meaning they receive a set amount regularly, similar to how a bond pays interest. Additionally, in the event of liquidation or profit distribution, preference shareholders are paid before equity shareholders. This makes preference shares less risky compared to equity shares, as they have guaranteed returns.
Examples & Analogies
Think of preference shares like a loan you give to a friend to buy a bike. You agree that they will pay you back a fixed amount each month, and if they also get a job that allows them to earn money, they can pay their other friends back later. Here, you have a priority because you expected your fixed amount first before others receive any money or repayments.
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Key Concepts
Core takeaways and short definitions to help you quickly recall the key ideas from this section.
Equity Shares: No fixed dividends and voting rights.
Preference Shares: Fixed dividends and priority in payments.
Face Value: Nominal value stated on the share certificate.
Issue Price: Price at which shares are issued.
Calls: Payments made in installments by shareholders.
Examples
Step-by-step examples to apply the section's ideas and test your understanding.
Example of Equity Shares: A company issues 1,000 equity shares with a face value of ₹10. Dividend is declared at 10% in a good year, so each shareholder earns ₹1 per share.
Example of Preference Shares: A company issues ₹1,00,000 preference shares with a fixed dividend of 8%. During the financial year, the company must pay ₹8,000 to preference shareholders before paying any dividends to equity shareholders.
Memory Aids
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Glossary
Equity Shares
Shares without a fixed dividend, where holders’ dividends vary based on company's profits.
Preference Shares
Shares with a fixed rate of dividend and priority in dividend payment over equity shareholders.
Face Value
The nominal value of a share as printed on the share certificate.
Issue Price
The price at which shares are offered for sale to investors.
Calls
Instalment payments that shareholders must pay when purchasing shares.