The registered capital of a company is divided into fixed number of units. Each of these units is known as a Share. The company issues these shares in order to raise its capital.
Types of shares:
The shares of a company are of the following types:
Ordinary shares are those the holder of which does not enjoy a fixed rate of dividend, They get dividend after preference, shareholders are satisfied. They do not get any dividend if no surplus of profit is left after the preference shareholders are paid off. Ordinary shares are also called Common Shares or Equity Shares.
Preference shares are those the holders of which enjoy a fixed dividend. They enjoy the preference in the receipt of dividend and repayment of capital. They. get dividend before the ordinary shareholders are paid any dividend. Preference shares are divided into the following classes:
- Cumulative preference shares
- Non-cumulative preference shares
- Participating preference shares
- Redeemable preference shares
- Irredeemable preference shares.
Cumulative Preference Shares:
These are the shares on which a fixed rate of dividend for each year is payable out of current or future profit. If the profit in any one year or a series of years is not sufficient to pay, such dividend accumulates and must be paid out of profit available in any succeeding year before the other shareholders can rank for dividend.
Non-cumulative Preference Shares:
The shares on which a fixed rate of dividend is payable only out of the profit of each year are known as non-cumulative preference shares. If the profit of any year be insufficient to pay the dividend no arrears of dividend is carried forward to the succeeding year.
Participating Preference Shares:
Participating preference shares are those which give the holders in addition to fixed dividend a right to share in the surplus profits after all other shareholders have received a specified rate of dividend.
Redeemable Preference Shares:
The holders of these shares are, at the option of the company or after a fixed period, paid back the entire capital contributed by them.
Irredeemable Preference Shares:
The amount of these shares is not paid during the existence of the company. It means that these shares are only redeemable after the winding up of the company.
These shares are generally issued to the founders/promoters of the company in consideration of the services rendered by them. These shares are called deferred shares because the dividend on these shares is paid after all other classes of shareholders have been fully satisfied. These shares are also termed as founder’s shares.