Categories of Share Capital for Competitive Examinations

Share capital is a fundamental component of a company's capital structure, representing the ownership interest of shareholders. The categories of share capital delineate the different types of shares a company can issue, each with its own set of rights and characteristics. Understanding these categories is essential for both investors and companies, as they influence voting rights, dividend entitlements, and overall governance. This exploration delves into the various categories of share capital, shedding light on their nuances and significance in corporate finance.

Categories of share capital is a very important topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know more about the categories of share capital in detail, along with certain other topics in detail.

Read about Capital market.

Share Capital

Share capital refers to the portion of a company's equity that is raised by issuing shares to investors in exchange for capital. It represents the ownership interest of shareholders in the company. Companies issue shares as a way to raise funds for various purposes, including expansion, investment in new projects, debt repayment, and general operational needs.

share capital is a foundational element of a company's financial structure, representing the ownership interest of shareholders and providing the company with the capital necessary for its operations and growth. The various types of shares and their characteristics contribute to the complexity and flexibility of the company's capital structure.

Read about Issue,forfeiture and reissue of shares.

Key Components of Share Capital

The components of share capital have been stated below.

• Shares: Shares are units of ownership in a company. When individuals or entities purchase shares, they become shareholders or equity holders in the company.
• Equity: Share capital is a component of a company's equity, representing the ownership stake of shareholders. Equity is the residual interest in the assets of the company after deducting liabilities.
• Capital Raised: Companies raise capital by issuing shares in the primary market through methods such as Initial Public Offerings (IPOs) or subsequent offerings.
• Types of Shares: Share capital is typically divided into different classes of shares, such as common equity shares and preference shares, each with its own set of rights and characteristics.

Also, read about Techniques of Capital Budgeting.

Types of Share Capital

The types have been stated below.

• Common Equity Shares: Common shares represent the basic ownership stake in a company. Holders of common shares have voting rights and share in the company's profits through dividends.
• Preference Shares: Preference shares carry preferential rights over common shares. They receive fixed dividends before common shareholders and may have priority in the distribution of assets in the event of liquidation.
• Authorized Share Capital: Authorized share capital represents the maximum number of shares a company is legally allowed to issue. It provides flexibility for future fundraising.
• Issued Share Capital: Issued share capital is the portion of authorized shares that the company has actually issued to investors.
• Unissued Share Capital: Unissued share capital refers to authorized shares that have not been issued. These shares can be issued in the future as needed.
• Treasury Shares: Treasury shares are shares that were previously issued and have been repurchased by the company. They do not carry voting rights and do not receive dividends.

Find out about Analysis Working Capital Management.

Different Categories of Share Capital

The categories have been stated below.

• Common Equity Shares:
  • Represent ownership in the company.
  • Carry voting rights in decision-making processes.
  • Share in the company's profits through dividends and capital appreciation.
• Preference Shares:
  • Have preferential rights over common equity shares.
  • Receive fixed dividends before common shareholders.
  • Typically do not carry voting rights but may have special voting rights in certain circumstances.
• Bonus Shares:
  • Issued to existing shareholders free of charge.
  • Reward for loyalty and may be distributed from retained earnings.
• Rights Shares:
  • Issued to existing shareholders at a discounted price.
  • Allow current shareholders to purchase additional shares before they are offered to the public.
• Authorized Share Capital:
  • Maximum number of shares a company is legally allowed to issue.
  • Provides flexibility for future fundraising but does not imply all shares are currently in circulation.
• Issued Share Capital:
  • Portion of authorized shares that the company has actually issued to investors.
• Unissued Share Capital:
  • Authorized shares that have not been issued to investors.
  • Can be issued in the future as needed.
• Treasury Shares:
  • Shares that were previously issued and have been repurchased by the company.
  • Do not carry voting rights and do not receive dividends.
• Equity and Preference Convertible Shares:
  • Can be converted into common equity or preference shares, depending on the terms specified.
• Redeemable Shares:
  • Shares that the company can repurchase after a specified period or under certain conditions.
  • Provide flexibility for the company to manage its capital structure.
• Cumulative and Non-cumulative Preference Shares:
  • Cumulative preference shares accumulate unpaid dividends, which must be paid before dividends to common shareholders.
  • Non-cumulative preference shares do not accumulate unpaid dividends.

Read about Multinational capital budgeting.

Conclusion

The categories of share capital play a pivotal role in shaping the structure and dynamics of a company. From common equity shares to preference shares, each category serves a distinct purpose, reflecting the diverse needs of investors and the strategic objectives of the company. The interplay of these categories contributes to the balance between risk and return, impacting both the financial well-being and governance structure of the organization.

Categories of share capital is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.

Study about Conventional techniques of capital budgeting analysis.