There are different types of shares issued by a company including the preference shares, the equity shares, and the right share. All these have some difference in the way they are defined and pay the dividends.
- Preference shareholders are the preferred first when a company distributes dividends.
- Equity shares are issued through IPOs (Initial Public Offerings) in the primary market (i.e. fresh issue of shares) or through re-sale in the secondary market.
Where it is mandatory for firms to pay dividends duly to preference shareholders, it is not the case for normal shareholders. So if at all the company is liquidating its assets to pay the debts, equity shareholders come the last. The company holds no liability to either pay dividends or return the invested money of shareholders in case of insolvency.
So, while investing in stocks, one should be very careful about the financial health of the company. One needs to carefully analyze each financial metric represented in the annual report of the company. If there is any indicator which are misleading or they are showing falling trend then such companies should not be a part of your investments. On the other hand, there are stocks that are real players in the market and have a great influence on the stock index. Such stocks not only pay you extras regularly but also reward you with different alternates like the right shares and bonus as well. Right shares are basically an issue where shareholders are given a privilege to sign up for new shares offered by the company; they can excise their right or let it go away. This is a way how corporate raise money. If shareholders do not go for rights issue, then the corporate may invite the outsiders to bid for the same. Right shares entail costs, so make smart investments in stocks.
Unlike right shares, bonus shares are free of costs and they are distributed as extra shares. So this way, the corporate increase the corpus of existing number of shares, thereby reduces the prices of per share. Bonus issue is always welcomed by the shareholders; however, if they are planning to reverse their position i.e. go short by selling the shares, then this would be subjected to the net effect of increased number of shares and the decrease in their values. With this background, you should know which a good company to invest in is. At given point of time, it may not be performing well, but hold your long position for a while and observe the movement. Do not rush with your decisions!
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities