Share Types
Although on the surface it would appear that all shares are the same - they are a portion of a specific company that is assigned a monetary value - there are actually different types of shares that have particular characteristics, are released in certain ways, or may be attributed with negative or positive connotations.
Common And Preference Shares
The basic way of classifying shares is into common shares (those which entitle the holder to a vote in policy at the Annual General Meeting of the company in question) and preferred shares (those which do not entitle the holder to a vote, but which often entitle the holder to preferential treatment upon the payment of dividends or in the event of the liquidation of the company).
New Share Issues
Shares may also be grouped by their mode of issue. Shares are issued in many different ways, the most common being a new issue that occurs when a once private company goes public, or when a state enterprise is privatised. Such shares will be released to the public in what is known as an Initial Public Offering, with the value of the shares being determined by perceived market interest. New issues can make good investments, especially if the company is an established and wealthy enterprise. The privatisation of public utilities in the 1980s and 1990s is a prime example of this.
Rights Issues
Another common type of issue is what is known as a 'rights issue', that is a further release of shares to present share holders that is undertaken in an effort to raise further funds, perhaps in order for the company to be able to undertake a major project or development. Rights issues can be quite complicated in that the company can determine the terms of the release - they decide how many shares are offered to each shareholder (usually in a ratio of one-to-two, meaning that for every two shares already owned the shareholder will be offered an additional one) and whether the offer can be declined or sold on. Investors may decide to pass on the rights issue offer, or may buy the offered shares in order to maintain their portion of the company.
Share Splits
Share splits are also quite common, occurring when a company that is already public decides that its present investment potential has been reached and that the division of their shares into smaller (and thus cheaper) portions is necessary. Share splits result in the share price falling, but with more shares on the market the potential to re-invest becomes easier. In theory the value of a shareholder’s investment is unaffected as the initial price of the split shares will be proportional to the magnitude of the split: for example, if the shares are split in two the initial value of the new shares will be half that of the original. It is important to remember, however, that normal market mechanics can cause newly split shares to fall or rise as soon as they begin to be traded.
Bonus Share Issues
Bonus issue shares may also be encountered by shareholders. Bonus issue shares are those that are given by the company to their shareholders, without charge, perhaps instead of paying out a dividend. Stocks and shares can also be awarded to company employees on one or more occasions as a condition of their contracts.
Other Share Types
Other types of shares to watch out for include restricted stock (shares that have specific conditions attached to them that prevent their sale and transfer until the conditions have been met), house stock (shares that are being pushed by a particular broker or firm, generally with the company the shares belong to offering the brokerage a financial incentive), and penny shares (common to newly public companies, they are shares with a low monetary value which may grow dramatically, giving large profits, or decrease in value dramatically, causing large losses).