When a fixed amount is divided into small units then we call it shares. A share is one unit of ownership of company. The persons, who invest the money in company’s capital, are called shareholders. For example a company wants to start its business with a capital of Rs.10 lacs. This 10 lacs are divided in one lac units. It means the price of one unit will be Rs.10. This particular unit will be called as one share. Shares may be classified in to following parts:-

Equity Shares:– The equity share is that share where the dividend is paid only when profits are left after paying preference dividend. Equity shareholders have voting rights. The payment of Equity shares is made only when the payment of preference share is completely made. Equity shares are redeemed only at the time of closure or liquidation of the company.

Preference shares:– The law defines preference shares as those which have a preferential right:-

  1. as to payment of dividend at a fixed rate during the lifetime of company; and
  2. as to  return of capital on winding up of the company.

It may be remembered that preferential shareholders have only preferential right to get the dividend and not the right to get the dividend. Preferential shareholders have no voting rights except in certain circumstances as defined by the law. Preference shares can be classified in following categories:-

  1. Cumulative preference shares:- In this case the arrears of  dividend are paid before paying the dividend to the equity shareholders. If the company goes into liquidation, arrears of dividends are not payable unless they are declared or any provision is kept in articles of association of the company.
  2. Non-cumulative preference shares:- where the arrears of dividend do not accumulate. If no dividend is paid during a particular period, it lapses.
  3. Participating preference shares:- They have the right of sharing the profit after dividend to all shareholders.
  4. Non-participating preference shares:- The do not have any right to share the surplus of profit after the payment of dividend equity shareholders.
  5. Convertible preference shares:- These shares can be converted in equity shares.
  6. Non-convertible preference shares:- These shares can not be converted into equity shares.

No company can issue the preference shares unless they are redeemable during the life time of the company. The maximum period of redemption is 10 years.