Summary: Partial ownership stakes in a company, that makes you eligible for.profits, voting rights, and potential dividends.
Shares represent ownership units in a limited company, distinct from direct ownership of the company itself. As a means to raise capital, corporations issue shares or debentures that are available for acquisition by individuals or other corporate entities. Those who acquire these shares assume the status of shareholders, thereby holding a financial right in the company’s operations.
In the case of a private limited company, the shareholders are typically the firm’s founders. Should the company seek to increase its financial assets, it may try to raise money from private investors while giving them shares. Public corporations, in contrast, must initiate an Initial Public Offering (IPO) to facilitate the trading of shares on the stock exchange.
Types of Shares
Each share grants the shareholder a stake in the company’s profits or losses. With varying participatory rights and different preferences in a company’s liquidation, different share types have been established, the primary ones being:
These are the most ubiquitous forms of shares. Holders of ordinary shares enjoy various benefits such as equal profits in the form of dividends, voting rights per share owned, and a portion of the capital gains if the company winds down its operations. To create a degree of variance among shareholders, some companies categorize ordinary shares further, these are often called Alphabet Shares and are divided into classes like Class A, Class B, Class C, etc.
Preference shareholders are prioritized over holders of ordinary shares during dividend dispersal and company liquidation. They, however, typically don’t have voting rights nor a share in capital gains as ordinary shareholders do. Companies determine the rights and advantages of preferential shares based on their specific needs, stipulated in its Constitution or resolutions passed in meetings. Due to the benefits they confer, preference shares are generally priced higher than ordinary shares.