Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Introduction to Shares
- This is a unit or portion of capital.
- It represents a stake in a limited liability business.
Types/Classes of shares.
- There are basically two types of shares:
- Ordinary and preference shares.
- these represent equity ownership in the business (i.e. they are owned by the owners of the business.)
- Ordinary shares have voting rights which entitle them to attend and vote during the Annual General Meeting.
- Ordinary shareholders have limited liability which means that they only lose amount invested and not their private assets.
- In the event of liquidation they are the last to receive their invested amounts after everyone (debentures, creditors and preference shares),
- they do not have a fixed rate of dividends and may not receive a dividend at all.
- They however usually have preemptive rights to buy shares in the event of rights issues.
- this is capital stock that is paid a fixed rate of dividends before the ordinary shares have been paid
- i.e. they have a preferred dividend.
- In the event of liquidation preference shareholders receive their capital contribution before ordinary shareholders but after creditors and debentures.
- They do not carry voting rights at Annual General Meetings nor do they usually have preemptive rights to buy shares.
- Cumulative preference shares– these are a special class of shares whose dividends is cumulative i.e. in years in which, due to some circumstances, their dividend is not paid it is paid in later periods together with the dividends of that later period i.e. the dividend cumulates.
Other ways to group shares
- Besides the methods above shares can also be grouped and described in other ways depending on their characteristics.
- These methods include:
- Convertible shares-these are shares that can be, at a later predetermined date and at the discretion of the shareholder, be converted into another class of stock.
- For example convertible preference shares that can be converted into ordinary shares at a certain date.
- Redeemable shares-these are shares that can be bought back by the company on a later predetermined date.
- For example Redeemable preference shares that the company can buy back at a future date.7
To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.