Types of Shares

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about types of shares. Enjoy the class!

Types of Shares

Definition of Shares

Shares can be defined as the units of capital or ownership of a limited liability company, it is the division of the company’s ownership into numerous equal parts. i.e. the interest which a shareholder has in the company. A company cannot commence business until it raises by selling to the public for subscription.

Types of Shares

1. Ordinary shares: These carry no special rights or restrictions.  They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears). Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.
2. Deferred ordinary shares: A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.  On a winding-up, they will only receive something once every other entitlement has been met.
3. Non-voting ordinary shares: Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all.  They may also preclude the shareholder even attending a General Meeting. In all other respects, they will have the same rights as ordinary shares.
4. Redeemable shares: The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common. The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option. If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.
5. Preference shares: These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year.  This is received ahead of ordinary shareholders.  The amount of the dividend is usually expressed as a percentage of the nominal value.  So, a N1, 5% preference share will pay an annual dividend of 5 naira. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it.  On a winding-up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders.  Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).
6. Cumulative preference shares: If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves.  It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid. By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.
7. Redeemable preference shares: Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder, therefore, benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.

Distinctions between Issues of Shares

Shares can be issued on the following terms:

1. Shares Issued at a Discount: This means that the shares are quoted below the nominal value. The issuance of shares at a discount must be stipulated by the provisions of the company’s act e.g. shares of N3 nominal value would be issued for N2. The difference between the nominal value and issuing value is N1.
2. Shares Issued at a Premium: Shares are issued at a premium when the issuing value is more than the nominal value. the difference is called a premium. The premium will be regarded as a capital reserve and will be posted to share premium account. e.g. shares of N3 nominal vale was issued at N5.the premium is N2, it occurs as a result of the attractive nature of the shares of the company.
3. Shares Issued at a Par: here, shares are not issued at a discount or premium but at the actual price, this means that the nominal price is equal to the issuing price. e.g. shares of N2 nominal value was issued at N2.

Evaluation

1. Define Shares
2. List the 6 types of shares
3. What are the terms for which Shares can be issued?
4. What is the difference between the redeemable preference shares and redeemable shares?

 

In our next class, we will be talking about Preparation of Accounts for the Issue of Shares.  We hope you enjoyed the class.

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