We’ve all heard about shares, and may have seen people talk about the types of shares of a company, but most times, many people can’t really explain what shares of a company mean.
Back in our secondary school days, in the Economics class, when issues of shares, share capital or share holding pops up, we’re like ohhhhhhhhh!
Also, I can remember some of my friends that just hate calculating this share of a thing. Then, it was all about allotment, which shares must be paid first, etc.
Well, in this article, I want to break things down a little. I’ll explain what shares of company are, types of shares, raising of capital and types of capital.
What are Shares of A Company?
A share is simply the individual portion of the company’s capital owned by shareholders. It is the interest which a shareholder has in a company.
In other words, a share is a UNIT of capital measured by a sum of money. It is also the interest in a company’s share capital of a member who is entitled to share in the income of such company.
In the event of mergers and acquisition of two or more companies, shares are a vital area of concern of all the parties involved.
Types of Shares of a Company
Categorically, shares of a company are of two major types, they are:
- Preference shares and;
- Ordinary shares.
Now, let’s explain each of theses shares in a company.
A. Preference Shares
A preference share is coined from the word “Preference” meaning a share of high priority.
A preference share is a type of share which has priority in terms of dividend payment and repayment of capital in the event of closure of a company.
This type of share has fixed rate of dividend. In other words, there are shareholders of a company that have preference shares, and that’s why they are called preference share holders.
Before we talk about other types of shares, let’s talk about features of a preference share.
Features of a Preference Share
- Preference shareholders have no voting right
- This type of shares have fixed rate of interest. This means whatever happen in the company business, they must be paid their fixed rate of interest.
- Holders receive dividends before others (high priority is given to them)
- They are entitled to returns of capital first at winding up
Types of Preference Shares
Preference shares are subdivided into cumulative, participating, redeemable, non-cumulative, and non-participating preference shares.
1. Cumulative Preference Shares
Cumulative preference share have priority in the share of dividend over others. Holders of cumulative shares receive arrears of dividend not paid before other shares.
This means that when no profit is declared, dividends of cumulative share holders will be carried forward to the following year. Other features include:
- No voting right
- Fixed rate of dividend
2. Participating Preference Shares
Participating preference shares are shares which are entitled to further percentage of dividends after the ordinary shares have received a specified percentage of profits.
This type of share has the right to participate equally with the ordinary shareholders in surplus dividends apart from their fixed dividends.
Features of participating preference shares include:
- They receive a fixed rate of dividends like other preference shares
- They participate in further dividends after all others have been paid
- They usually receive dividends before ordinary shareholders.
3. Redeemable Preference Shares
Redeemable preference shares are shares which have prior claims to dividends before all other preference shares.
The owners of the business can buy back these shares after some time. The shares are issued to finance a particular project.
The redemption of preference shares must not be regarded as amounting to reduction of capital.
- Redeemable preference shareholders have prior claim before other preference shares
- These shares can be bought back
- They are issued out to finance project
4. Non-cumulative Preference Shares
This type of share is one in which the dividend does not accumulate from one year to another. Where a company fails to pay dividend in a particular year, it cannot be carried forward.
5. Non-Participating Preference Shares
Non-participating preference shares are the opposite of participating preference shares. They are not entitled to further dividends after the ordinary shares have been paid.
Now, let’s move to the second share under the two broad categories of shares – ordinary shares.
B. Ordinary Shares
Ordinary shares of company are also known as equities. The ordinary shareholders are the real owners of the business.
The holders are the risk bearers and they receive their dividends after all other shares have been paid.
Features of ordinary shares include:
- There are no fixed rate of dividend
- They have voting rights
- The holders are the real owners of the business
- They receive dividends last.
Types of Ordinary Shares
Ordinary shares are subdivided into Deferred ordinary shares and Preferred ordinary shares. Let’s break it down.
1 Deferred or Founders Shares
Deferred shares are shares which are entitled to the remainder of profit after all other shares (preference and ordinary) have been paid.
- Deferred shares are usually issued to founders or promoters of the busieness
- The holders are issued to the remainder of the dividends after all other have been paid.
2. Preferred Ordinary Shares
Preferred ordinary shares are shares which receive dividend after the preference shares have been paid. They have preference over other classes of ordinary shares.
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How Companies Raise Capital
Either private or public limited liability companies, capital is required to run the company, isn’t it?
The methods by which a company raises capital or issue its shares are:
A prospectus giving particulars of the company and its business, is published with application form, shares are allotted to those who apply.
For more understanding of what a Prospectus is, read about the 5 important documents during company formation.
2. By offer of Sale
The whole issue of share is allotted to an issuing house (Merchant bank, finance house) which offers them to the public by means of a document known as “offer for sale”
Learn more about all types of banks in Nigeria and their functions
3. By Placing
This is a method of issuing securities through an intermediary such as a firm of stock brokers. The intermediary will endevor to place the issue among its institutional investors.
4. By a Right Issue
When a company is established, it may raise further capital by offering the shares concerned to existing members on favorable terms.
5. By Introduction
The company concerned can apply to the stock exchange for sales of its shares. There will be an offer to the public of a new issue of shares through the stock exchange.
Types of Capital
There are different types of capital available to a company. These include:
a. Issued Capital
This represents the part of the authorized capital given out to members of the public for subscription. It is after the issued capital is fully subscribed that it can now be referred to as subscribed capital.
b. Reserved Capital
A reserved capital represents the portion of the capital not called up, which the directors have assumed to be incapable of being called up any time.
The uncalled-up capital is a liability to the company and is set aside for further expansion.
c. Authorized Capital
Authorized capital is also called nominal or registered capital. This is the highest amount of capital stipulated in the memorandum of association considered as enough to set up and run the company.
d. Called-up capital
Called-up capital is the portion of the capital which the management considers good enough to be called up on the issued shares.
What Are Shares? (Summary)
There you have it on shares, types of shares and how companies raise capital through shares.
So, when asked “what are shares” I’m sure you can now explain, isn’t it? But let me ask, if you were to pick any of the shares, which share would be your favorite share?
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