Looking for what are shares in company and stock market, its meaning definition and types as per the syllabus of class 12 CBSE, ISC and State Board.
The topic of shares is concerned with the ‘Accounting for share capital’ chapter of accountancy class 12
What are shares
The total capital of a company is divided into units of small denominations.. Each such unit is called ‘share’
Let’s understand it with an example
Suppose, total capital of a company is ₹ 1,00,000. If we divide it with ₹ 100, as below
1,00,000/100 = 1000
the figure comes 1000.
It implies, the total capital ₹1,00,000 is divided into 1000 units of ₹100 each.
Thus each unit of ₹100 will be called a share.
Now we can say there are 1000 share of ₹ 100 each of this company.
It you invest ₹100 in this company. You will own a share of a company. If you invest ₹ 1000. You will own 10 share of ₹100 each in the company.
Nature of Shares
following are the few properties (features) of a share.
- The Shares of a Company are movable property. These are transferable in the manner provided by the Article of Association of the Company.
- Share of a company are treated as goods under the Sales of Goods Act, 1930. These can eb bought, sold, hypthecated (to give as a security against credit) and bequeathed (to transfer by will).
Definition of Shares
‘Share is a unit in which the capital of the company is divided. Each share has its nominal (face) value.’
‘The total capital of the company is divided into units of small denominations. Each such unit is called ‘share’.
What are the Types of Shares in a company (Class 12)
Section 43 of the Companies Act, 2013 prescribes that the company can issue two types of shares.
- Preference Shares
- Equity Shares
What are Preference Shares
As per Section 43(b) of the Companies Act, 2013, preference shares are those which carry the following two rights.
- They have a right to receive dividend at a fixed rate before any dividend is paid on the equity shares.
- When the company is wound up, they have a right to the return of capital before that of equity shares.
Apart from the above rights, the preference shares may carry some more rights such as
- Right to participate in excess profits when a specified dividend has been paid on the equity shares.
- Right to receive a premium at the time of redemption.
What are types of Preference Shares
Following are the types of preference shares.
Cumulative Preference Shares:-
These shares are those preference shares, the holders of which are entitled to recover the arrears of preference dividend before any dividend is paid on equity shares.
It means, if the company is unable to pay the dividend on preference shares in the past year, such dividends keep on accumulating.
When a company is able to pay dividends in a particular year, the first accumulated dividend on cumulative preference shares is paid before equity shares.
Non-Cumulative Preference shares:-
The holders of such shares get a fixed amount of dividend out of the profits of each year. If no dividend is declared in any year due to any reason, such shareholders get nothing, nor can they claim unpaid dividend of any year in any subsequent year.
Participating Preference Shares:-
Such shares, in addition to the fixed preference dividend, carry a right to participate in the surplus profits, if any, after a dividend at a stipulated rate has been paid to equity shareholders.
Similarly, in the event of winding up, if after paying back both the preference and equity shareholders, there is still some surplus profit, such shareholders are entitled to receive a pre-determined proportion of surplus.
Non-participating Preference Share:-
Such shares get only a fixed rate of dividend every year and do not carry a right to participate in the surplus profits or in any surplus on winding up. Unless expressly provided, the preference shares are usually non-participating.
Redeemable Preference Shares:-
Such shares are those which will be repaid by the company within a stipulated period in accordance with the terms of issue and the fulfilment of certain conditions laid down in section 55 of the Companies Act 2013.
Irredeemable Preference Shares:-
Irredeemable Preference Shares are those, the capital of which can not be refunded before winding up.
Note:- As per section 55 of the Companies Act, 2013, no Company limited by shares, shall issue any preference share, which is irredeemable or is redeemable after the expiry of 20 years from the date of its issue.
Convertible Preference Share:-
Holders of these shares have a right to get their preference converted into equity shares at their option according to the terms of the issue.
Non-Convertible Preference Shares:-
Such shares can be not converted into equity shares.
What are Equity Shares
Equity share are those share which are not preference shares.
following are the characteristics of Equity shares.
- Equity shares are paid dividend after the preference shares holders.
- There is no fixed rate dividend to Equity Share Holders.
- If in any year, there are not enough profit or no profits, Equity shares are not paid any dividend.
- If the company earns more profit, they get a higher rate of dividend.
- At the time of winding up of company, Equity share holders capital are returned after the preference share holders capital are returned in full.
- Equity shareholders have voting rights and controls the affairs of the company.