Shares are defined as a part of the company’s ownership. Shares are a smaller part of the capital. The person or a legal entity who owns the shares is called the shareholder.
A company issues shares when it is looking to raise capital for investments or any other reason. The other reason may be to pay debt or dividends to its existing shareholders.
Shares are also called stocks. Stocks are a financial document that is the evidence that you own shares in a particular company.
The numbers of share issued by a company differ from company to company but adding up all these shares always amount to a 100% total ownership of the company.
Now, while shares are always talked about for public companies; private companies may also issue shares.
But, these shares are usually held by large owners, and ownership of these shares is not available to the large public as compared to the shares of the publically listed companies.
For example, the outstanding shares of Apple Inc are 16.929 Billion. These are all public float shares which means they are available for the public to invest in.
Whereas Facebook inc has 2.88 Billion shares as public floats. Apple has about ten times more shares than Facebook, so it really depends upon the company how many shares it floats in the public market.
Types of Shares
There are three main types of shares that are issued by a company. The three main types are shown in the figure 1 below:
Figure 1: Three types of shares
The three types of shares shown in figure 1 are Equity shares, preference shares and deferred shares. These three are further divided into sub-types. A detailed explanation of all three is given below:
Equity means a part of something and in this situation a part of the company. Equity shares are the simplest form of shares and these are also the most common types of shares issued by a company. Equity shares are also called common shares.
The holder of equity share receives dividends, if the company pays dividends, and is allowed to participate in shareholders’ meetings.
The equity shares holder is also allowed to vote in meetings for future plans. One of the disadvantages of the equity share is that the capital associated with the equity share cannot be redeemed over the lifetime of the company.
The main advantages of the equity shares are that these types of shares do not put any burdens on the finances of the company that issues these shares and also there is no burden on the assets of the company.
The main types of equity shares are Authorized share capital, issued share capital, Subscribed share capital, Paid-up capital, Right share, bonus share, and Sweat equity share.
All of these shares are issued on specific occasions and needs associated with the company. For example, Sweat equity shares are issued to the employees to award them for their work.
These shares are as the name implies preferred. These shares are usually owned by the insiders in the company.
These insiders are founders, co-founders, and higher-ranking executives. The type of preference depends upon the need of the company.
There are two main types of preference shares and those are, preference shares for dividends that allow for preferred payments of dividends and preference shares for voting that allows for increased voting rights.
For example, Google has one of the most famous dual share structures. These are divided into A types and B types. The inner circle of Google owns the preferred share class.
These preferred share class is based on voting shares. So, Google insiders such as its founders have two votes for a single preferred share. This allows the insiders to control the working of Google.
An example of dividends preferred shares is the deal between Warren Buffet and General Electric during the global financial crisis of 2007-2008.
General Electric was facing cash flow problems during the Global financial crisis of 207-2008 and no one was willing to lend to G.E. So, G.E made a deal with Warren Buffet Berkshaw Hathaway.
In the return for this deal, G.E had to issue first of all dividends to the G.E stock held by Warren Buffet and the number of dividends for this stock was also very high.
Deferred shares are the lowest type of all three main types of shares. These are called founder shares. Deferred shares are also called deferred because they are paid after the dividends to all other types of shareholders.
These shares also have the last claim on the assets of the company during the bankruptcy proceedings.
Deferred shares are issued for long-term investment. They are issued as a form of compensation to the employees of the company. These shares are also issued to venture capital funds for long-term investments.
How these shares work is that they are issued to high-level executives and then locked away.
The executives cannot sell these shares until pre-described data or when they leave the company. This helps in aligning the long-term interest of the company with the monetary interests of the company.
These issues are not locked in the form of stocks. The usual practice is to keep a book entry for the amount of value the shares would fetch at their current market price.
This price is determined by metrics decided by the company to evaluate the price of the preferred shares. The cash is then converted to the stock at the present market value of the stock.
These are then issued to the employee when the lockup period of the stock expires. This process is also called the vesting of stocks.
The shares are issued by a public company to raise capital to meet its need. There are three main types of shares and the particular type of shares a company issues according to its situation and needs. Each type has its merit and demerits.