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Summary
- A stock or an equity gives its holder a portion of ownership of a company, entitling the stockholder to a proportion of the company’s assets and profits.
- Broadly, there are three main types of shares that are traded on the ASX.
- It is important for an investor to understand the difference between various shares while making investment.
A stock or an equity gives its holder a portion of ownership of a company. It is a security that entitles the stockholder to a proportion of the company’s assets and profits in proportion to how much stock he owns. A company distributes dividends to the shareholders based on their ownership proportion. The shareholders can also book capital gains when the value of the company rises.
Broadly, there are three types of shares that trade on ASX. Each type of share has its own characteristics and attributes. It is important for an investor to understand the difference between various kinds of shares while making investment, since these characteristics can impact the decision.
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Ordinary shares
Majority of shares that trade on the ASX are ‘ordinary’ shares, whose shareholders do not get special or preferred rights other than the right to vote at the company’s annual general meeting (AGM). They are also entitled to receive dividends as and when the company announces. Additionally, they can participate in distribution of assets on winding up of the company on the same basis as other ordinary shareholders.
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Preference shares
When compared with ordinary shareholders, the preference shareholders get a ‘preference’ over ordinary shareholders during the times of dividend payments or on winding up of the firm. Preference shares are of different types and come with varied rights and characteristics.
The voting rights of such shareholders are restricted to specific circumstances or resolutions. However, these rights depend on the terms of the shares.
Partly-paid shares
Partly-paid shares also known by the name of contributing shares. These are issued by a company without the need to pay full issue price.
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Such a shareholder has the same rights as that of an ordinary shareholder, when it comes to voting, dividend payouts or winding up of the company. However, these rights would be proportional to the amount they have paid for the shares.
Retail investors have to enter into an agreement with their broker before they begin to trade in partly-paid shares. This is done to acknowledge that they understand the risks involved.
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How to identify different types of shares?
The best way to identify a share type (other than ordinary share) is via a company’s ASX code. Each product, which is traded on the ASX, carries a unique identification code. The code is displayed on the ticker boards of the ASX and media share market tables. Every security issued by a company incorporates a company code.
For instance, the code for National Australia Bank Ltd is ‘NAB’.
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The ordinary shares of an ASX-listed company have a three-character code similar to the company code. The security is likely to be something other than an ordinary share in case of more or fewer than three characters in the code.
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For instance, preference shares generally come with a five-letter code, consisting of a company code and a two-letter suffix.
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