1. Ordinary Shares:
Ordinary shares, also known as common shares, are the most common type of shares issued by a company. These shares represent ownership in the company and provide shareholders with certain rights and benefits. Ordinary shareholders have voting rights, allowing them to participate in important company decisions, such as electing the board of directors or approving major changes. They also have the potential to receive dividends, which are a portion of the company's profits distributed to shareholders.
One of the key features of ordinary shares is their risk and reward nature. Shareholders bear the highest risk in the company since they are the last to receive payment in the event of bankruptcy or liquidation. On the other hand, they have the potential to enjoy the highest rewards if the company performs well and its share value increases. Ordinary shares are suitable for investors seeking long-term growth and who are willing to take on the associated risks.
2. Redeemable Shares:
Redeemable shares are a unique type of shares that come with a predetermined maturity date or a redemption feature. These shares can be bought back by the company at a specific price or redeemed at the request of the shareholder after a specified period. The redemption price is typically fixed or determined by a formula stated in the company's articles of association.
The redeemable feature of these shares offers flexibility to both the company and shareholders. It allows the company to manage its capital structure and provides an exit option for shareholders if they desire liquidity at a future date. However, it's worth noting that redeemable shares may have limited voting rights or no voting rights at all, as their purpose is primarily tied to their redemption terms rather than ownership control. Investors looking for a more tailored investment horizon or an exit strategy within a specific timeframe may find redeemable shares appealing.
3. Preference Shares:
Preference shares, as the name suggests, provide shareholders with certain preferences or advantages over ordinary shareholders. These shares typically entitle shareholders to fixed dividend payments, which are paid out before any dividends are distributed to ordinary shareholders. Preference shareholders have a higher priority in receiving dividends and, in the event of liquidation, have a greater claim to the company's assets compared to ordinary shareholders.
Preference shares may come in different forms, such as cumulative or non-cumulative. Cumulative preference shares accumulate any unpaid dividends, meaning that if dividends are not paid in a particular year, they must be paid in future years before ordinary shareholders can receive any dividends. Non-cumulative preference shares, on the other hand, do not accumulate unpaid dividends.
Investors who prefer a more stable income stream or a higher priority in receiving dividends may opt for preference shares. However, preference shareholders generally have limited or no voting rights, as their primary focus is on receiving preferential treatment rather than participating in company decisions.
In conclusion, understanding the different types of shares is crucial for investors to make informed decisions. Ordinary shares offer ownership, voting rights, and potential long-term growth. Redeemable shares provide flexibility and an exit option, while preference shares offer preferential treatment in dividends and asset distribution. Each share type caters to different investment objectives and risk tolerance, so investors should carefully evaluate their goals and seek professional advice before making any investment decisions.