The Different Types of Shares
There are three primary types of shares, which vary in terms of their application and popularity. These include:
- #1. Equity Shares: Equity shares are also referred to as ordinary shares and the most popular iteration of this asset. The vast majority of shares issues by corporations are equity shares, which are also traded actively in the secondary stock market and afford holders voting rights in company meetings and decisions. They’re also entitled to any dividends declared by the directors, although this may vary from year to year depending on performance and profitability.
- #2. Preference Shares: Next up are so-called “preferential shares”, which as the name suggests, afford holders additional and preferential rights when compared to other iterations of this asset. These investors tend to get first preference when it comes to dividend payouts, for example, while this type of shareholder is also the first in line to receive their money back if a company is wound up. Preferential share holders are typically early or large investors.
- #3. Differential Voting Right (DVR) Shares: Typically, DVR shareholders have fewer voting rights when compared to equity shareholders, with this model widely used by firms to dilute voting privileges. However, due to their reduced importance, DVR shares are typically cheaper and offer better financial value, with the price gap between them and equity shares usually between 30% and 40%.
How Are Shares Issued?
When it comes to how shares are used, this will depend on the nature and scale of the business and the stage at which it’s at. For example, startup or smaller, family firms may issue equity shares to friends or family, usually in exchange for initial launch funds.
This can create more flexible arrangements and minimise the cash burden placed on your firm early on, affording you a little more financial breathing space over time.
You can also create employee share ownership schemes, with Facebook having successfully replicated this model. This affords staff members a stake in the firm and aids employee retention, while providing a clear incentive for optimal performance.
Companies may also issue capital through the stock market, usually over an extended period of time as a way of raising large sums of money.
This creates a broad distribution of shares within the business, and it’s a model usually favoured by larger corporations.
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