Equity Share Types

Equity shares are a fundamental component of the stock Market, representing ownership in a company. Understanding the equity share types is crucial for investors aiming to diversify their portfolios and maximise returns. Here, we will delve into equity shares and the various types available.

Topics Covered :

• What are Equity Shares?
• Types of Equity Shares
• Conclusion

What are Equity Shares?

Equity shares, also known as ordinary shares, represent a unit of ownership in a company. When an investor purchases equity shares, they become a part-owner of the company, with a claim on its profits and assets. Equity shareholders have voting rights in the company’s annual general meetings and can influence major decisions, such as electing the board of directors or approving mergers and acquisitions.
These shares are traded on stock exchanges, and their prices fluctuate based on the company’s performance, market trends, and investor sentiment. The primary benefits of holding equity shares include potential capital appreciation and dividend income. Dividends are portions of a company’s earnings distributed to shareholders, usually in the form of cash or additional shares.
Investors can buy and sell equity shares through a demat account online, which facilitates the electronic storage and transfer of securities. This modern method of holding shares eliminates the risks associated with physical share certificates and makes trading more efficient.

Types of Equity Shares

Understanding the different types of equity shares is essential for making informed investment decisions. Here are the main types of equity shares available in the market:

Authorised Shares

Authorised shares refer to the maximum number of shares a company is legally permitted to issue as per its corporate charter. This number is decided when the company is incorporated and can be increased later with shareholder approval. Authorised shares are not necessarily issued to the public; they simply set the upper limit of shares the company can distribute.
For example, a company may have authorised capital of 10 million shares but may choose to issue only 5 million shares to raise funds. The remaining 5 million shares remain authorised but unissued, giving the company flexibility to issue more shares in the future for expansion or other purposes.

Issued Shares

Issued shares are a subset of authorised shares distributed to shareholders, including the public, company insiders, and institutional investors. These shares represent actual ownership in the company and can be traded on stock exchanges.
For instance, if a company has authorised 10 million shares and issued 5 million shares, investors currently hold 5 million shares. The company can issue more shares from its authorised capital if it needs to raise additional funds.

Subscribed Shares

Subscribed shares are those that investors have committed to purchasing during an initial public offering (IPO) or a rights issue. The company issues these shares to investors who have subscribed, indicating their interest in owning part of the company.
For example, during an IPO, if a company offers 5 million shares and investors subscribe to all of them, these 5 million shares become subscribed shares, representing the commitment of investors to buy them.

Paid-Up Shares

Paid-up shares are the portion of subscribed shares for which investors have fully paid the subscription price. These shares represent the capital shareholders invest and are reflected on the company’s balance sheet.
If a company issues 5 million shares at Rs. 10 each and investors pay the full amount, these 5 million shares are considered paid-up. The company can then use this capital for its business operations and growth.

Bonus Shares

Bonus shares are distributed to existing shareholders without additional cost, based on the number of shares already owned. Companies issue bonus shares from their free reserves to reward shareholders and increase the liquidity of their shares.
For instance, a company might declare a 1:1 bonus issue, meaning shareholders receive one additional share for every share they hold. If an investor owns 100 shares, they would receive 100 bonus shares, doubling their total holdings to 200.

Rights Shares

Rights shares are offered to existing shareholders at a discounted price before they are offered to the public. This allows current shareholders to maintain their proportional ownership in the company. Rights issues typically raise additional capital for growth or debt reduction.
For example, a company might offer a rights issue of 1 share for every 5 shares held at a 20% discount to the current market price. If an investor owns 500 shares, they can purchase an additional 100 at a discounted price.

Sweat Equity Shares

Sweat equity shares are issued to employees or directors of a company as a reward for their contributions, such as providing technical expertise or innovative ideas. These shares serve as an incentive for key personnel to continue contributing to the company’s success.
For instance, a technology company might issue sweat equity shares to its lead developer for creating a groundbreaking software product. These shares can motivate employees to remain with the company and align their interests with those of shareholders.

Preference Shares

Although not strictly equity shares, preference shares are often categorised under equity due to their hybrid nature. Preference shareholders receive fixed dividends before equity shareholders and have a higher claim on assets in case of liquidation. However, they usually do not have voting rights.
For example, a company might issue preference shares with a 5% annual dividend. Preference shareholders receive this fixed dividend before dividends are paid to equity shareholders. In the event of company liquidation, preference shareholders are paid out before equity shareholders.

Conclusion

Understanding the equity share types is essential for making informed investment decisions in the stock market. Each type of equity share has unique characteristics and benefits, catering to different investment strategies and goals.
By leveraging an online demat account, investors can easily manage and trade these shares, optimising their portfolios for maximum returns. Whether you’re a new investor or an experienced trader, knowing the different types of equity shares can help you navigate the complexities of the market more effectively.