8 Types of Shares: How to Diversify Your Investment Portfolio

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types of shares

Shares are the cornerstone of any investment in a company, leading you to understand a company’s performance, whether it’s success or failure. This article aims to guide you through the various types of shares in the financial world. 

We’ll focus on the unique features of each share along with their benefits and tips to help you understand how many types of shares are available and what makes them unique.


What Are Shares?

Shares are basically small pieces of a company that you can own. When you buy these shares, you become a shareholder and get a slice of the company’s ups and downs. The different types of shares in a company encounter the varied needs of investors and achieve specific business goals.

Owning shares helps companies to gain money by selling parts of the business to other people. When you buy shares from the company, it gives you a chance to grow your money as the company does well. You might even get extra income from dividends. 

However, it’s important to do your homework on the companies you’re thinking of investing in and to think about your own financial plans and how much risk you can handle.

⚠️Tips: Shares are generally liquid, allowing for quick conversion to cash.


Key Takeaways

  • Shares are units of ownership in a company that offer a stake in its assets and earnings.
  • Shares can offer high returns compared to traditional investment options like bonds.
  • Different types of shares exist, each with unique features and benefits.

8 Types of Shares

In the wide world of investment options, shares hold a special place with their variety and complexity. You may wonder how many types of shares are provided. Here are the different types of shares in a company that you should consider for investing:

1. Ordinary Shares (Common Shares)

Ordinary shares, also known as common shares, are the basic types of shares in a company’s ownership. When you own these shares, you get to vote on big company decisions, like who sits on the board of directors or what major steps the company should take next. 

The money you make from dividends can change depending on how well the company is doing. Plus, as the company grows, the value of your shares could go up too.

2. Preference Shares (Preferred Shares)

Preference shares, also known as preferred shares, give you first priority on dividends and also put you at the front of the line if the company has to sell off its assets. Now, let’s dive into the different types of preference shares.

  • Cumulative Preference Shares: If you own these shares, you’re in luck if the company can’t pay dividends for one year. The money they owe you piles up and has to be paid out before any other shareholders get a cent.
  • Non-Cumulative Preference Shares:  If the company skips dividends for a year, you can’t claim them later. These are the opposite of cumulative ones.
  • Participating Preference Shares: When you get your regular dividends, you’ll also get extra, if the company does really well after the ordinary shareholders have been paid.
  • Convertible Preference Shares: If you invest in these shares, you will be able to switch your preferred shares for ordinary shares after a certain time. It’s a way to possibly make more money if the company’s value goes up.
  • Redeemable Preference Shares: When the expiration date arrives, the company has to buy the shares back from you at the agreed price, giving you a safety net.

⚠️Tips: Preference shares are ideal for those seeking stable, regular income.

3. Deferred Shares

Deferred shares are known as founders’ shares. It doesn’t come with voting rights like other types of shares. However, they offer the perk of getting dividends after all other types of shares have been paid. These are usually in the hands of the company’s founders or big stakeholders.

4. Bonus Shares

Bonus shares are like a gift to current shareholders, costing them nothing. They’re issued from the company’s saved-up profits and are meant to make the shares more easily traded in the market. This also helps to make the share price more appealing to the future investors.

5. Rights Shares

Rights shares are first offered to existing shareholders when the company decides to issue new shares. They come at a discounted price, allowing current shareholders to keep their same level of ownership in the company.

6. Treasury Shares

Treasury shares are types of shares that the company once sold but has bought back. They don’t come with voting rights and are often kept on hand for employee stock plans or retirement benefits.

7. Bearer Shares

Bearer shares used to be simple to own; you just had to have them in your possession. Since they could be used for illegal activities like money laundering, many countries have put restrictions on them or gotten rid of them altogether. 

8. Sweat Equity Shares

Sweat equity shares are like a pat on the back for the company’s employees, directors, or promoters. They’re either cheap or free and are given as a gift for helping the company grow. It’s a way to keep important people focused on the company’s success.


What Are the Benefits of Investing in Shares?

Investing in shares offers various advantages that can help you grow your wealth and secure your financial future. Below are some of the benefits you can get when investing in shares: 

1. Potential for High Returns

One of the most enticing aspects of investing in shares is the potential for high returns. Unlike traditional savings accounts or bonds, which offer modest interest rates, shares can provide substantial profits if you invest wisely.

2. Dividend Income

Owning shares in a profitable company often comes with the perk of receiving dividends. These are regular payments made to shareholders, providing a steady income stream in addition to any capital gains.

3. Ownership and Voting Rights

When you buy shares, you’re not just investing your money; you’re buying a piece of the company. This often comes with voting rights, allowing you to have a role in company decisions, from electing board members to approving mergers.

4. Liquidity

Shares are generally easy to buy and sell because of the stock market’s setup. This liquidity means you can quickly convert your investment into cash if you need to, unlike assets like real estate, which can take time to sell.

5. Diversification

The stock market offers a wide range of shares from various sectors, allowing you to diversify your investment portfolio. Diversification can help decrease risks and increase the chances for good returns.

6. Tax Benefits

In some jurisdictions, investing in shares can come with tax advantages, such as lower capital gains tax or tax-free dividends, making it a more attractive investment option.


5 Tips on How to Choose the Right Share Type

Since there are different types of shares provided for investors, it is important to have a thoughtful plan and some financial guide to help you choose the right one.

1. Define Your Investment Goals

Define what you want to achieve with your investment. Your goals will guide you in choosing the share types that best suit your needs.

2. Assess Risk Tolerance

Know how much risk you’re comfortable taking. If you don’t prefer risk, you might prefer shares that offer more stable returns, like preference shares.

3. Evaluate Time Horizon

Think about how long you plan to invest. Different shares offer different growth potentials over time, so choose ones that align with your investment timeline.

4. Research Company Performance

Look into the financial health of the company whose shares you’re considering. Strong company performance can make certain share types, like ordinary shares, more appealing.

5. Diversify Your Portfolio

Spread your investments across different types of shares to reduce risk and create a more balanced portfolio.

⚠️Tips: The more you diversify your portfolio, the more you can reduce your risk.


Conclusion

Exploring types of shares offers various investment options. It also provides benefits like voting rights and special dividends. When you understand the outstanding types of shares, you can wisely invest in the shares market. 

To pick the right share type, it is important to choose the one that fits your financial goals, and you need to be able to risk tolerance. However, remember to follow expert advice and market trends to make smart investment choices.


FAQs

1. How many types of shares are there?

There are several types of shares, including ordinary shares, preference shares, deferred shares, bonus shares, rights shares, treasury shares, bearer shares, and sweat equity shares.

2. What is the difference between a share and a stock?

A share represents ownership in a specific company, while stock is a general term that can refer to ownership in any company.

3. What is the difference between share types?

Different types of shares offer various benefits like voting rights, special dividends, and levels of risk. For example, ordinary shares usually come with voting rights, while preference shares offer more stable dividends.

4. Which type of share is best?

The best types of shares depend on your financial goals and risk tolerance. If you want a more stable income, preference shares might be better. If you’re looking for growth and are willing to take risks, ordinary shares could be more suitable.


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Read more: Stocks

By FinxpdX Team
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