A guide to the different types of shares: ordinary shares, preference shares and non-voting shares

What are the different types of shares?

There are many types of shares that can be offered to investors, depending on the privileges and rights a company wants to give its investors. The three main categories of shares are:

• Ordinary shares
• Non-voting shares
• Preference shares                                                            

Within each of these categories, there are other types of shares, or different names for shares, that you might have heard of too – such as common stock or redeemable shares.

 

What are ordinary shares?

Ordinary shares are the units of ownership in companies that are publicly traded on exchanges. If the perceived value of the company as a whole goes up, then the price of its ordinary shares will rise – and vice versa if it falls.

They’re the most common type of shares, which is why they’re also known as common shares or common stock. So, if you’re looking to invest in a company, or trade on its market price, more often than not you’ll be buying and selling ordinary shares.

Learn more about share trading with us.

The more ordinary shares you own, the greater the portion of ownership you have. For example, if a company issues 100,000 shares and you own 10, you’d have a 0.01% stake in the business.

This class of shares typically gives the buyer certain benefits, such as voting rights at shareholders’ meetings on policy changes and stock splits.

 

Class A vs Class B vs Class C

Some companies have multiple classes of common stock, which are distinguished alphabetically – class A, class B and class C. They’re structured differently, to grant more voting rights to shareholders so some individuals can maintain control.

For example, Alphabet’s shares were restructured in order for founders Sergey Brin and Larry Page to maintain control over business decisions despite not owning a majority. Class A shares are held by public investors who are granted one vote per share, Class B shares are held predominately by Brin and Page and grant 10 votes per share, and Class C shares are held by Alphabet employees and possess no voting rights.

Learn about Alphabet's upcoming stock split. 

 

Does common stock pay dividends?

Common stock doesn’t necessarily pay dividends. Ordinary shares will sometimes pay out income to shareholders, but usually it’s dependent on the company’s performance and whether the company plans to reinvest any profits.

If dividends are paid to common stockholders, the amount will be proportional to the number of shares owned.

However, it’s important to note that usually ordinary shareholders are the last in line to receive any dividend payments. The company will first distribute income to preferred shareholders.

 

How many shares of common stock are issued?

The number of shares of common stock issued can vary from company to company. In theory, a company can operate with just one share, but 10,000 shares are often seen as the minimum.

When a company first issues shares, normally through an initial public offering, it will list a number of shares based on the expected value of the company. For example, if the company is worth $1 million at IPO and shares are priced at $10 each, then 100,000 shares would be issued.

After an initial listing, a company can issue more common shares provided existing shareholders approve the move.

Take a look at the upcoming IPOs to watch.

 

What does common stock mean on a balance sheet?

On a balance sheet, common stock is recorded as ‘shareholder equity’. The figure is used when looking at a company’s book value, net worth and other financial ratios. It’s important to note that shares traded openly on exchange can differ from the intrinsic value shown on a balance sheet, as they’re subject to market forces and speculation which can inflate or deflate the share price.

Learn how to read an earnings report. 

 

What are non-voting shares?

Non-voting ordinary shares are similar to ordinary shares, except they carry no right to vote and no right to attend general meetings. These shares are usually given to employees so that remuneration can be paid as dividends instead of cash – this is usually for the purpose of being tax efficient for both employer and employee.

 

What are preference shares?

Preference shares are a kind of hybrid security, sitting somewhere between a stock and a bond. They guarantee a set dividend payment each year and are generally less volatile than ordinary shares – which makes them ideal for the more risk-averse trader. However, they do not typically have any voting rights.

If the company enters bankruptcy proceedings, preferred shareholders are entitled to be paid before common stocks.

There are four types of preferred stock:

• Cumulative – shareholders have a right to receive any dividends that have been missed in the past before other classes of shareholders
• Non-cumulative – these shares have no right to missed dividends
• Participating – shareholders of participating preferred stock have the right to be paid dividends equal to the prespecified rate of preferred dividends plus an additional dividend. The additional dividend will be paid if common shareholders are paid a higher dividend than the preferred rate
• Convertible – these shares include an option for shareholders to convert their preferred shares into a specific number of common shares after a pre-established date

 

Are preference shares debt or equity?

Preference shares are an equity instrument, because they’re secured by an asset. Debt securities that are issued by a company do not have an underlying share tied to the contract.

 

Are preference shares redeemable?

Preference shares can be redeemable. A company may only redeem its shares under the terms of the contract it has with investors, or the action must be approved by preferences shareholders.

 

Other types of shares

What are redeemable shares?

Redeemable shares are issued under the agreement that the company is expected to buy them back at a future date. This date is normally fixed or set at the director’s discretion.

Most redeemable shares are non-voting, so that they can be redeemed if the employee leaves and the shares can be taken back at their cash value.

 

What are restricted shares?

Restricted shares are unregistered, non-transferable shares issued directly to a company's employees as part of incentive schemes. They’re not that common but are found in established companies that can provide such an equity stake.

Restricted shares are also usually held by a company’s senior management and institutional investors.

 

What are outstanding shares?

Outstanding shares are the total number of shares that have been issued on the open market – it includes stock held by the company, employees and individual shareholders, as well as restricted shares that are held by a company's officers and institutional investors. On a company balance sheet, they are listed as capital stock.

 

What are authorised shares?

Authorised shares are the legal maximum of shares a company is allowed to issue to investors. The number of authorised shares will be specified in the company’s articles of incorporation or in the capital accounts section on its balance sheet.