Types/Classes of Shares


Classes of shares

The share capital of a company which is divided into shares may be of different classes. The most common ones are preference shares and ordinary shares.

Preference shares
These are shares which are entitled to a fixed amount of dividend and have priority over ordinary shares in receiving dividend when declared. For example, 12% Preference Shares will be entitled to dividend equal to 12% multiplied by the nominal value of Issued Preference Share Capital. Preference shares may be further distinguished between cumulative or non-cumulative.

Cumulative preference shares are entitled to receive yearly dividend. If no dividend is declared in a particular year, this entitlement is carried forward as arrears of dividend to the following year. Thus, it is possible for several years' dividend entitlement to accumulate and once declared, this total accumulated dividend has priority for payment over the ordinary shareholders' claim for dividend. The usual assumption is preference shares are cumulative unless stated otherwise. Non-cumulative preference shares do not carry forward dividend entitlements to a subsequent year.


Ordinary shares
These are shares which a company is required to issue if it has only one type of shares. They usually carry the right to vote on company matters; for example in electing the Board of Directors. Thus, it is possible for a majority shareholder to exercise control over the company with his votes. Ordinary shares are entitled to all the profits that remain after the preference shares have been paid.
 

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