Ordinary (Common) Shares
Detailed Description
Common stock is the most common type of stock, and it provides the underlying ownership in any corporation. These are voting securities, meaning that they grant shareholders voting rights (commonly one vote per share), allowing them to influence major corporate decisions like electing the board of directors or approving mergers and acquisitions.
Key Considerations
- Dividends: Dividends on common shares are discretionary and tied to the company’s success. They’re not guaranteed and can be skipped if the company runs into financial trouble.
- Risks: Common shareholders are the last in line to be paid during liquidation, entitling them only to a portion of what’s left in the company’s assets after debts, bondholders, and preferred shareholders are settled.
- Investment Potential: These shares can perform well for the company, which means share prices will go up, and investors can earn capital gains.
Example
Tech giants such as Apple and Microsoft have issued common stock that represents the bulk of their shares.
Preferred Shares
Detailed Description
Preferred shares are a hybrid between equity and debt. They provide fixed income through dividends, as opposed to common shares, and do not offer the same voting rights. Preferred shareholders are paid dividends before common shareholders.
Key Variations
- Cumulative Preferred Shares: If the company is unable to pay dividends in a particular period, it has to pay those missed payments in the future before paying any dividends to common shareholders.
- Non-Cumulative: These shares do not give the right to receive unpaid dividends if the company skips payments.
- Participating Preferred Shares: Shareholders receive additional dividends depending on company performance, typically tied to specific profitability targets.
- Convertible Preferred Shares: These include an option to convert into a set number of common shares, providing upside potential if the company grows.
Example
Utilities companies often use preferred shares as a means to provide investors with steady income for their conservative portfolios.
Equity Shares
Detailed Description
Equity shares represent ownership in a company and are generally interchangeable with common shares. The term emphasizes the shareholder's ownership stake and claim on future profits.
Key Features
- Shareholders have a right to vote, dividends, and benefit from appreciation in share prices through ownership.
- Equity shares are the default vehicle companies use to raise capital in IPOs (Initial Public Offerings).
Example
Both startups and established companies issue equity shares to generate funds for business expansion or working capital.
Redeemable Shares
Detailed Description
Redeemable shares come with a clause allowing the company to buy them back after a designated time or under certain conditions. The repurchase can be at an agreed-upon price or market value.
Key Features
- Portability of Capital: Companies can assist in their equity and debt structuring by issuing redeemable shares.
- Investor Security: These shares have clear terms and conditions, ensuring a minimum return.
Example
A company starting a temporary project may issue redeemable shares to finance it, later buying them back when the project ends.
Non-Redeemable Shares
Detailed Description
Non-redeemable shares represent a permanent stake in the company. Unlike redeemable shares, they cannot be repurchased by the company.
Key Features
- Provide greater stability in ownership; shareholders retain their stake unless they dispose of their shares.
Example
Public companies typically issue non-redeemable common shares.
Participating Shares
Detailed Description
Participating shares provide investors with a fixed dividend plus additional compensation if the company reaches certain profitability levels. They may also offer greater entitlement on assets during liquidation.
Key Features
- Higher Returns: Owners receive fixed dividends and supplementary dividends linked to company performance.
- Risk Mitigation: The fixed dividend provides a cushion, while participation in revenue offers growth potential.
Example
Funds often issue participating shares based on how well a fund performs to reward investors.
Non-Participating Shares
Detailed Description
Non-participating shares pay fixed dividends to shareholders but do not allow participation in surplus profits or additional dividends.
Key Features
- These shares are usually cheaper and appeal to investors seeking predictable, stable returns without extra perks.
Example
Non-participating shares are often issued by companies in traditional industries like manufacturing.
Convertible Shares
Detailed Description
Convertible shares give investors the right to exchange their shares for common shares after a set period or under certain conditions.
Key Features
- Potential to Appreciate: Shareholders can convert to common shares, realizing capital gains if the company performs well.
- Flexible Terms: The conversion ratio (e.g., 1 preferred share = 5 common shares) and timing are established in the issuance terms.
Example
Venture capital firms typically prefer convertible preferred shares for the safety of debt combined with the opportunity for equity growth.
Non-Convertible Shares
Detailed Description
Non-convertible shares cannot be exchanged for another type. These are plain equity or preferred shares with predetermined terms.
Key Features
- Less flexible but more predictable, often guaranteeing fixed returns.
Example
Non-convertible preferred shares are commonly issued by companies seeking a steady stream of dividend income.
Growth Shares
Detailed Description
Growth shares represent companies reinvesting their profits to fuel expansion rather than paying dividends. These shares are typically from high-growth industries like technology or healthcare.
Key Features
- High Risk, High Reward: Investors depend on capital gains rather than regular income.
- Reinvestment Priority: Companies focus on R&D or market growth.
Example
Early shares in Amazon focused on growth, offering minimal dividends but substantial stock price appreciation.
Income Shares
Detailed Description
Income shares prioritize dividend payments over capital appreciation, catering to investors seeking regular income.
Key Features
- Stable Returns: Provide consistent dividends.
- Lower Volatility: Issued by well-established firms with reliable cash flows.
Example
Income shares are often issued by real estate investment trusts (REITs) and utility companies.
Blue-Chip Shares
Detailed Description
Blue-chip shares represent ownership in large, established, and financially sound companies that consistently produce solid returns.
Key Features
- Trustworthiness: Stock prices are less volatile than those of smaller organizations.
- Dividend: Conservative investors value blue-chip stocks for their regular dividends.
Example
Blue-chip stocks include Coca-Cola, Johnson & Johnson, and Procter & Gamble.
Penny Shares
Detailed Description
Penny stocks are low-priced shares issued by small-cap companies, typically traded on secondary or over-the-counter (OTC) markets. These stocks are speculative and risky.
Key Features
- Volatility: Prices can rise or fall rapidly.
- Growth Potential: Ideal for growth investors seeking outsized returns but willing to face significant losses.
Example
Biotech startups regularly issue penny stocks during their early funding rounds.
Rights Shares
Detailed Description
Rights shares are offered at a discounted price to existing shareholders, allowing them to maintain their ownership percentage during additional capital raises.
Key Features
- Exclusive Offer: Only existing shareholders can purchase these shares.
- Price Advantage: Shares are sold below market price.
Example
Rights issues are common for companies in expansion phases or those bridging operational losses.
Bonus Shares
Detailed Description
Bonus shares are issued to shareholders at no cost, typically from retained earnings or reserves. They increase the number of shares owned but do not change the value of the total investment.
Key Features
- More Ownership: Shareholders own more shares, but the stock price usually adjusts accordingly.
- No Cash Outlay: Shareholders receive dividends without investing additional capital.
Example
A 1:1 bonus share issuance means shareholders receive one extra share for every share they own.