Shares are an integral part of the financial market, representing ownership in a company and providing investors with the opportunity to participate in its profits and decision-making processes. In this article, we will delve into the definition of shares, explore their types, and understand the key characteristics that distinguish ordinary and preferred shares.
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Definition of Shares
Shares are units of ownership in a company, and they entitle their holders to a percentage of the company's capital. They are also known as securities and can be traded directly or through financial markets. Shares may come with a fixed interest rate, making them a valuable investment option.
Types of Shares
Shares come in various types, each with its own set of characteristics and benefits. Let's take a look at the two primary types:
Common Stocks
Common stocks are the most commonly issued and traded stocks in the financial market. These stocks represent private ownership in a company and entitle the shareholders to a percentage of the company's financial profits. Investors holding common stocks have the right to participate in the election of the company's board of directors, with each share granting one vote.
Investing in common stocks can be beneficial in the long term, as it helps in capital development and increases financial returns. However, common stocks also carry some risks, especially if the company faces financial difficulties and undergoes liquidation.
Preferred Shares
Preferred shares are distinct types of shares that offer certain advantages over common stocks. They provide shareholders with guaranteed and fixed profits, unlike the variable profits associated with ordinary shares. In the event of the company's liquidation, preferred shareholders receive their shares before other shareholders, making them a safer investment option.
Preferred shares are further categorized into different types:
- Direct (Non-cumulative) Shares: These preferred shares entitle the shareholders to obtain declared returns. However, if the company cannot pay dividends, the investors do not have any entitlements.
- Cumulative Shares: These shares protect shareholders in times of financial difficulties or non-payment of dividends. The value of the company's dividends accumulates until it can pay them.
- Participation Shares: Shareholders holding participation shares are entitled to declared preferred share profits and additional joint profits.
- Transferable Shares: These shares provide the advantage of exchanging preferred shares for ordinary shares at a fixed conversion price.
- Call Shares: Call shares benefit the company, as it has the right to recover this type of shares upon their expiry.
Issuing Shares
The issuance of shares is a crucial function for joint-stock companies. It allows individual shareholders to participate in the company's founding capital and provides an opportunity to increase the company's capital in the future. Some common reasons for issuing shares include increasing financial liquidity, financing new projects, and participating in other companies for strategic or investment purposes.
Shareholders' Rights
Shareholders enjoy several guaranteed rights under the law, including:
- Obtaining a share of the company's liquidation value.
- Participating in the company's management and attending general and extraordinary shareholders' meetings.
- Voting in the election of the Board of Directors.
- Receiving a share of the profits distributed during the year.
Accessing important documents and information regarding the company's business and activities.
Characteristics of Stocks
Each type of stock possesses unique characteristics:
Characteristics of Ordinary Shares
- Remaining claim: Shareholders have rights to the company's income and assets during the liquidation process.
- Limited liability: In the event of bankruptcy, shareholders may lose the value of their investments.
Characteristics of Preferred Shares
Dividends: Preferred shares receive dividends similar to ordinary shares.
Similar to bonds: Preferred shares pay dividends based on a pre-agreed arrangement at regular intervals.
No voting rights: Shareholders holding preferred shares do not have voting rights.
Shares are essential instruments in the financial market, allowing individuals to become part-owners of companies and share in their success. Understanding the different types of shares and their characteristics is crucial for making informed investment decisions. Whether you opt for common stocks or preferred shares, each offers unique benefits and risks. By leveraging the advantages of various share types, investors can build a diversified and robust investment portfolio.