Page 46 - DIY Investor Magazine | Issue 29

INVESTING BASICS: EQUITY SHARE CLASSES
Most UK limited companies will have just one share class – sometimes ‘ordinary’, ‘common’ or ‘voting’ shares – but it is possible for a business to have two or more distinct groups of equities at any one time – writes Christian Leeming.
Ordinary shares are the most common form in the UK; ownership gives the right to share in the profits of the company, and to vote at its general meetings.
‘Ordinary’ differentiates it from ‘preference’ stock which may be issued to founders or early investors in a business, attracting different benefits as a hybrid debt/equity instrument.
EXAMPLES OF DIFFERENT SHARE TYPES
Class of share
Ordinary A
Nominal Number Value £
1 500
0.5 1000
0.1 2000
Totals
500
500
200
Voting Rights
One share equals one vote
One share equals one vote
No voting rights
Rights to Dividends
Equal rights to dividends
No rights to dividends
Equal rights to dividends
Holders of preference shares generally receive dividends
before holders of ordinary stock and may receive: B
• Preference in assets in the event of liquidation
• Convertibility to common stock.
• Callability, at the option of the corporation
• Nonvoting
‘In the event of liquidation, preference shareholders are subordinate to bondholders and creditors (including employees) but senior to ordinary shareholders when it comes to their claim on a company’s assets.
Because of this hierarchy, holders of ordinary stock often
get nothing in the event of bankruptcy; however, over time, ordinary shares tend to perform better than either preference shares or bonds.
Different share classes may be issued when a company offers different rights or privileges to a particular group of shareholders; in theory there is no limit to the number of classes of shares a company can create. Rights could differ according to:
• Voting rights
• The right to dividends
• Guaranteed or variable dividend
• Payouts received on the winding up of the company
Ordinary
Ordinary C
Totals
3500 1200
Here three share classes essentially operate independently
of each other in terms of units issued and the rights attached. The breakdown determines what holding an individual has in a company and their rights to vote and receive dividends
A shareholder can hold more than one class of share in a company with different rights and benefits; a holder of 250 Ordinary A shares and 500 Ordinary B shares would possess 750 of the available 1500 voting rights but only be eligible for 10% (2500/250) of the dividends.
Shares may be offered in an Initial Public Offering (IPO) when companies come to market for the first time, bought in the ‘secondary market’ via broker on the London Stock Exchange, or as a ‘rights issue’ to existing shareholders.
A rights issue is a further release of shares by a company to raise funds, perhaps to fund a major project, development
or acquisition. Often the shareholder is offered one share for every two they hold; the company decides whether these are offered at a discount, or whether the offer can be declined or sold on. If the shareholder declines, their stake in the company is diluted by the additional shares in circulation.
Other types of shares include ‘bonus’ shares which may
be given to shareholders instead of a dividend or to tie key employees into a company, ‘restricted stock’, which have specific conditions attached to them regarding their sale and transfer, and ‘penny shares’ which may offer speculative appeal due to their low cost but could offer the potential for large profits or losses in equal measure.
DIY Investor Magazine | Jun 2021 46