When a company divides its ownership capital into smaller units, each unit is called a share. However, not every share gives its holder exactly the same rights. The dividend priority, voting power, repayment position and conversion terms can differ according to the class and terms of issue.
For an Indian beginner, the most important distinction is between equity shares and preference shares. Section 43 of the Companies Act, 2013 broadly recognises these as the two kinds of share capital for a company limited by shares. Equity capital may carry ordinary voting rights or differential rights, while preference capital carries preferential rights relating to dividend and repayment of capital.
This guide explains the main types of shares, how their rights differ, and why terms such as bonus shares, rights shares and employee stock options should not be confused with permanent share classes.
Quick Answer: What Are the Main Types of Shares?
The two main types of share capital in India are:
- Equity shares: These normally represent ownership, voting rights and participation in the company’s long-term growth. Their dividends are not guaranteed, and equity holders rank after creditors and preference shareholders if the company is wound up.
- Preference shares: These receive preference over equity shares for payment of dividend and repayment of capital. Their voting rights are generally more limited and depend on applicable law and issue terms.
Within these broad groups, shares may have additional features. Equity shares can carry ordinary or differential voting rights. Preference shares may be cumulative, non-cumulative, participating, non-participating, convertible, non-convertible or redeemable.
Why Do Companies Create Different Share Classes?
A company may need capital from investors with different expectations. Some investors want long-term ownership and voting participation. Others may prefer a stated dividend framework and priority over ordinary equity, even if that means less influence over management.
Different share classes allow a company to define:
- who can vote and how much voting power they receive;
- who receives dividend first;
- whether unpaid dividends accumulate;
- who receives repayment first during winding up;
- whether a security can convert into equity; and
- when and how the company may redeem it.
These rights are not determined by the name alone. Investors must read the company’s articles, offer document, exchange filings and specific terms of issue.
If you are new to ownership itself, first read what a share means and what rights it can provide.
What Are Equity Shares?
Equity shares are the ordinary ownership capital of a company. An equity shareholder participates in the company’s economic outcome after higher-ranking claims have been met. If the business grows and the market values it more highly, the share price may rise. If the business performs poorly, the price can fall and dividends may be reduced or omitted.
Equity shareholders generally have the right to vote on company matters in proportion to their paid-up equity holding, subject to the Companies Act, the company’s articles and any differential-rights structure. They may vote on matters such as appointment of directors, certain corporate actions and resolutions placed before members.
Equity ownership does not create a guaranteed return. A company can retain profits instead of declaring a dividend, and a quoted market price can change continuously through exchange order matching. Our guide on how share prices are decided explains that price-discovery process.
Main Characteristics of Equity Shares
- They represent residual ownership in the company.
- They normally carry voting rights.
- Dividends depend on profits, company policy and valid declaration; they are not assured.
- Equity holders may benefit from capital appreciation.
- They bear a comparatively high level of business and market risk.
- They rank after creditors and preference shareholders for repayment during winding up.
What Are Preference Shares?
Preference shares occupy a position between ordinary equity and debt-like instruments, but they remain share capital. They receive preference over equity shares in two important respects:
- payment of dividend at the stated rate or amount, according to the issue terms; and
- repayment of capital if the company is wound up.
This preference does not mean that the investment is risk-free. A preference shareholder still faces issuer risk, liquidity risk, interest-rate sensitivity, legal conditions and the possibility that the company cannot meet its obligations.
Preference shareholders generally do not vote on every resolution in the same way as ordinary equity shareholders. Section 47 of the Companies Act provides the relevant voting framework, including voting on resolutions that directly affect their rights and circumstances in which wider voting rights may arise.
Main Characteristics of Preference Shares
- Priority over equity for dividend and repayment of capital
- Usually limited voting rights
- Dividend terms stated in the issue conditions
- Possible cumulative, participating or conversion features
- Redemption according to the issue terms and applicable law
- Return and risk profile different from ordinary equity
Equity Shares vs Preference Shares
| Point | Equity Shares | Preference Shares |
|---|---|---|
| Basic role | Ordinary ownership capital | Capital with preferential rights |
| Dividend | Variable and not guaranteed | Priority according to stated terms |
| Voting | Normally available | Usually limited, subject to law and terms |
| Growth participation | Generally higher potential participation | Often more limited or defined |
| Repayment on winding up | After creditors and preference capital | Before equity, after higher-ranking claims |
| Risk profile | Higher exposure to business performance and price movement | Different risk profile; still exposed to issuer and liquidity risk |
| Conversion | Usually already equity | May be convertible or non-convertible |
Neither class is automatically “better.” The suitable security depends on its exact rights, price, liquidity, issuer quality, time horizon and the investor’s risk capacity.
Types of Equity Shares
1. Ordinary Equity Shares With Voting Rights
These are the shares most retail investors encounter on Indian stock exchanges. Each share normally carries voting power in proportion to the paid-up equity capital held, subject to the law and company documents.
Ordinary equity holders participate in gains only after the company meets operating costs, taxes, debt obligations and other senior claims. That residual position can create significant upside when a business performs well, but it also creates substantial downside risk.
2. Equity Shares With Differential Rights
The Companies Act permits equity share capital with differential rights as to dividend, voting or otherwise, subject to prescribed rules. One class may carry different voting power or economic rights from another.
Investors should never assume that two shares issued by the same company are identical merely because both are described as equity. Check the class description, voting ratio, dividend rights, listing status and transfer conditions.
3. Sweat Equity Shares
Sweat equity shares may be issued to eligible directors or employees in recognition of know-how, intellectual property rights or value addition, subject to legal and regulatory requirements. They are a method of issuing equity for a specified purpose—not a third broad category beside equity and preference capital.
4. Shares Arising From Employee Options
An employee stock option gives an eligible employee a right, but not an immediate obligation, to acquire shares under the scheme’s conditions. The option itself is not the same as an issued equity share. Equity shares arise only after vesting, exercise and allotment under the applicable framework.
Types of Preference Shares
Preference shares can combine more than one feature. For example, an issue may be described as cumulative, non-participating and redeemable. Therefore, these labels are not always mutually exclusive.
1. Cumulative Preference Shares
If the company does not pay the specified dividend for a period, the unpaid amount accumulates according to the terms. The arrears generally need to be addressed before equity shareholders receive dividend.
2. Non-cumulative Preference Shares
If a dividend is not declared or paid for a period, the missed amount does not normally carry forward. The holder loses that period’s entitlement under the terms.
3. Participating Preference Shares
These may participate in additional profits or surplus assets beyond their preferential entitlement if the issue terms provide for it.
4. Non-participating Preference Shares
These are generally limited to the specified preferential dividend and repayment rights and do not participate in additional surplus beyond the agreed terms.
5. Convertible Preference Shares
These may convert into equity shares under specified conditions, such as a conversion date, ratio or triggering event. Conversion changes the holder’s economic and voting position, so the formula and resulting dilution matter.
6. Non-convertible Preference Shares
These do not convert into equity. Their return and repayment remain governed by their original terms.
7. Redeemable Preference Shares
These are repaid or redeemed under the stated terms and within the legal framework. Section 55 of the Companies Act governs the issue and redemption of preference shares and generally does not permit irredeemable preference shares.
Voting Rights: What Changes Between the Classes?
An equity shareholder normally votes on every resolution placed before the company, with voting power linked to the paid-up equity held. This is one of the clearest differences between ordinary equity and preference capital.
A preference shareholder’s voting rights are generally connected to resolutions directly affecting the rights attached to those shares. The law also provides circumstances in which preference shareholders may vote on all resolutions, including specified situations involving unpaid dividend.
The practical lesson is simple: do not treat “shareholder” as meaning identical control rights. Read the voting clause for the exact security.
Dividend Rights: Is Any Dividend Guaranteed?
Equity dividends are not fixed obligations. A profitable company may retain earnings for expansion, debt reduction or reserves instead of distributing them.
Preference shares have a preferential dividend framework, often expressed as a rate or amount, but “preference” should not be confused with an unconditional guarantee. Payment remains subject to the issue terms, applicable law and the company’s financial position.
For cumulative preference shares, unpaid dividends may accumulate. For non-cumulative shares, they normally do not. This distinction can materially change expected cash flows.
Repayment Priority During Winding Up
The order of claims matters when a company does not have enough assets to satisfy everyone:
- secured and other creditors are dealt with according to applicable insolvency and company law;
- preference shareholders receive their contractual priority over equity, subject to available assets and higher-ranking claims; and
- equity shareholders receive only the residual value, if any.
Priority reduces neither the possibility of loss nor the need for due diligence. Preference shareholders can still lose money if assets are insufficient.
Rights Shares, Bonus Shares and Share Classes Are Not the Same
Beginners often refer to rights shares and bonus shares as separate “types of shares.” More accurately, these are ways in which a company issues additional shares.
Rights Issue
In a rights issue, a company offers specified securities to existing shareholders as of a record date, usually in proportion to their existing holding. A shareholder may be able to subscribe, decline or renounce the entitlement, depending on the terms.
SEBI’s retail guide to rights issues explains the process and investor considerations. A rights issue can affect the number of outstanding shares and an investor’s ownership percentage if the investor does not participate.
Bonus Issue
In a bonus issue, additional shares are issued to existing shareholders without consideration in a stated ratio, using eligible reserves or accounts under the applicable framework. A bonus issue increases the number of shares but does not, by itself, create business value.
Stock Split
A stock split divides each existing share into a larger number of shares with a proportionately lower face value. It is different from a bonus issue, although both may increase the number of shares held.
Sweat Equity and ESOP Allotments
Sweat equity and shares allotted after exercise of employee options are purpose-specific issuance routes. Once issued, the resulting shares generally belong to an equity class with defined rights.
How Share Type Affects Market Capitalisation
Market capitalisation is generally calculated using the current market price of equity shares multiplied by the number of outstanding equity shares. A bonus issue, split, rights issue, conversion or fresh allotment can change the share count, but the effect on value depends on the complete transaction and the market’s response.
Read what market capitalisation means and how it is calculated before comparing companies only by their share price.
You can also use the Regal Ticker Investor Tools for practical calculations. A calculator can help with arithmetic, but it cannot determine whether a particular share class is suitable or fairly valued.
How to Check the Exact Rights Attached to a Share
Before investing, verify:
- the exact name and class of the security;
- whether it is equity or preference capital;
- voting rights and any differential voting ratio;
- dividend rate, priority and cumulative status;
- conversion ratio and conversion date, if applicable;
- redemption date and redemption terms;
- participation rights in additional profits or assets;
- listing status and trading liquidity;
- lock-in, transfer or eligibility conditions;
- issuer filings, offer documents and corporate announcements.
Use official exchange filings, the company’s investor-relations page and regulatory documents. Do not rely only on promotional descriptions or social-media messages.
SEBI’s Understanding Shares page provides a beginner explanation of share ownership, while Section 43 of the Companies Act provides the legal foundation for equity and preference share capital.
Common Beginner Mistakes
Assuming a Low Share Price Means a Cheap Company
A ₹50 share is not automatically cheaper than a ₹500 share. Outstanding share count and total business value matter. Compare market capitalisation and fundamentals, not price alone.
Treating Preference Shares Like Guaranteed Deposits
Preference rights provide priority over equity, not immunity from default, illiquidity or capital loss.
Confusing an Issue Route With a Share Class
Rights, bonus, private placement, sweat equity and ESOP describe how or why securities are issued. Equity and preference describe the principal legal character of share capital.
Ignoring Differential Rights
Two equity classes may not provide the same voting or dividend rights. The class terms matter.
Focusing Only on Dividend Rate
A stated preference dividend does not replace analysis of issuer strength, redemption terms, liquidity, taxation and purchase price.
Key Takeaways
- Indian company law broadly recognises equity and preference share capital.
- Equity shares normally provide ownership participation and voting rights but rank last for repayment.
- Preference shares receive priority over equity for dividend and repayment, subject to their terms and higher-ranking claims.
- Preference shares can be cumulative, participating, convertible, redeemable or carry combinations of these features.
- Ordinary and differential-rights equity can provide different voting or economic rights.
- Rights issues, bonus issues, sweat equity and ESOP allotments are issue mechanisms or purpose-specific routes, not substitutes for the equity-versus-preference distinction.
- Always verify the exact terms of the security before investing.
Frequently Asked Questions
How many types of shares are there in India?
The two principal kinds of share capital under Section 43 of the Companies Act are equity share capital and preference share capital. Each can have additional rights or features.
Which is better: equity shares or preference shares?
Neither is universally better. Equity generally offers greater participation in growth and voting, while preference shares offer defined priority rights. Suitability depends on terms, valuation, liquidity, issuer quality and risk tolerance.
Do equity shareholders always receive dividends?
No. Equity dividends are not guaranteed. The company must have the legal and financial capacity to declare them, and its board and shareholders follow the applicable approval process.
Can preference shareholders vote?
Yes, but their voting rights are generally more limited. They vote on matters directly affecting their rights, and the Companies Act provides additional circumstances in which broader voting rights may arise.
Are bonus shares free profit?
No. Bonus shares are issued without consideration, but the company’s overall value does not automatically increase merely because the number of shares rises.
Are rights shares compulsory to buy?
No. An eligible shareholder can generally decide whether to subscribe, subject to the offer terms. Not participating may reduce the shareholder’s percentage ownership.
What are DVR shares?
DVR commonly refers to equity shares with differential voting rights. Their voting or dividend rights differ from ordinary equity according to the issue terms and applicable rules.
Are preference shares risk-free?
No. They carry issuer, liquidity, market, legal and repayment risks. Preference over equity does not guarantee payment.
Can one preference share have several features?
Yes. A preference issue can combine features—for example, cumulative, non-participating, convertible and redeemable—if its terms and applicable law permit.
Official Sources
- SEBI Investor: Understanding Shares
- India Code: Companies Act, 2013, Section 43—Kinds of Share Capital
- India Code: Companies Act, 2013, Section 47—Voting Rights
- SEBI Investor: Rights Issue of Shares
- SEBI: FAQs on Issue of Capital and Disclosure Requirements
Educational content only. This article does not constitute investment advice or a recommendation to buy or sell any security.
