What are the 4 types of shares? – FinancePolice guide

Quick answer: the four share types at a glance

One-sentence summary

If you are a beginner in share market, this short overview names the four share categories most retail investors see: common shares, preferred shares, bonus or scrip shares, and rights issues.

Common shares usually mean ownership with voting rights and variable dividends, while preferred shares tend to focus on fixed dividends and priority on claims; bonus and rights are corporate actions that change share counts or offer subscription opportunities rather than new business models, and rules vary by exchange and regulator. Investopedia guide

Why this matters for a beginner

Knowing which type you hold or are offered helps you decide if the position supports your goals, like steady income or long-term growth.

It also prepares you for actions you may need to take, such as exercising rights or checking settlement timelines announced by exchanges.

Why knowing these share types matters for beginners

How share type affects your goals

The share type you own can affect whether you get voting influence, regular cash payments, or priority if a company winds down, so it matters for aligning holdings with your time horizon and risk tolerance. CFA Institute investor resource

Common investor decisions that depend on share type

For example, investors seeking income may prefer instruments that offer stated or fixed dividends, while growth-focused investors may accept variable dividends and rely on capital gains instead.

Beginners should also watch for dilution risk and administrative steps tied to corporate actions, and check local regulator or exchange notices for exact procedures.

Common (ordinary) shares – what they are and what to watch for

Definition and typical rights

Common shares represent residual ownership in a company and usually carry voting rights and variable dividends; dividends are paid at the company’s discretion and are not guaranteed. Investopedia guide

Because common holders are last in line on claims, they benefit most from company growth but have lower priority in liquidation compared with other claimants.

When common shares suit an investor

Common shares often suit investors focused on long-term capital growth and willing to accept dividend variability and voting responsibilities.

Practical checks: review the company’s dividend history, confirm the voting class of your shares, and check liquidity so you can buy or sell without undue cost or delay.

Preferred shares – how they differ and when investors use them

Key features and trade-offs

Preferred shares typically offer fixed or stated dividends and have priority over common shares for dividends and in some liquidation scenarios, but they commonly restrict voting rights compared with common shares. SEC investor glossary on preferred stock

Because preferred dividends are often fixed, preferreds tend to be compared with income instruments, though terms vary and some preferreds can be callable or convertible to common stock.

Preferreds in a portfolio

Consider preferreds when you need a clearer income pattern than typical common dividends provide, but remember limited voting and sometimes capped upside can affect long-term growth potential.

Decision factors include income needs, the issuer’s creditworthiness, and whether the preferred issue has special terms like convertibility or call provisions.

Bonus (scrip) shares – what they are and why companies issue them

Mechanics: capitalization of reserves

Bonus shares, also called scrip issues in some markets, are shares issued to existing shareholders by capitalizing reserves or retained earnings; they increase the number of shares held but do not immediately change proportional ownership value. UK Government guidance on share classes and share capital

Companies often use bonus issues to adjust share price or signal confidence, but the underlying company value is not increased just by issuing bonus shares; check exchange and regulator notices for the precise mechanics in your market. SEBI circular on bonus share trading and settlement See Practical Law or ClearTax procedure for bonus shares.

Investor implications and what does not change immediately

After a bonus issue, your percentage stake in the company typically remains the same, though your holding statement will show more shares at a lower per-share price.

Regulators and exchanges publish settlement guidance for bonus issues and some markets updated rules recently, so confirm timelines before trading or relying on share counts.

Rights issues – how they work and why they matter for existing shareholders

Subscription rights explained

Rights issues give existing shareholders a limited-time option to buy newly issued shares, often at a set or discounted price, under a subscription arrangement announced by the company. Investopedia guide

Dilution and defensive actions

If you do not exercise rights, your percentage ownership and voting power can be diluted when new shares are issued; shareholders commonly choose to exercise, sell the rights, or let them lapse depending on their situation. FT explainer on rights and bonus issues

When a rights offer arrives, compare the offered price to market price, confirm you can fund the purchase if you plan to exercise, and note the exercise deadline and settlement instructions provided by the company or exchange.

How to compare share types – a simple decision checklist

Five key decision factors

Use these core decision factors before you buy or respond to a corporate action: purpose, voting rights, priority on claims, dilution risk, and fees or tax consequences. CFA Institute resource on equity securities

Purpose relates to whether you need income or long-term growth; voting rights affect influence at shareholder meetings; priority on claims matters in distress; dilution risk is key for rights issues; and fees, tax, and settlement rules can change net outcomes.

Applying the checklist to a real situation

Start by naming your main goal, then eliminate options that clearly do not match; for example, remove shares with limited voting if corporate control is important to you.

If you face a rights offer, run the checklist quickly: does the price make sense, can you afford to exercise, and what happens if you do not exercise the rights.

Tax, settlement and regulatory points to verify locally

Why these rules vary

Tax treatment of dividends, bonus shares, and proceeds from selling rights differs by jurisdiction, and settlement timelines are set by exchanges and can change over time, so local verification is essential. SEBI circular on trading and settlement

Where to look for authoritative guidance

Primary sources include the national regulator’s website, exchange circulars, and the company notice or offer circular; these documents state deadlines and tax notes most reliably. Also see our investing category.

If you are unsure about tax effects, consult a tax advisor in your country rather than relying on summaries or third-party articles.

Common mistakes and pitfalls beginners make

Mistake examples

Beginners sometimes assume bonus shares increase their investment value immediately, ignore dilution from rights issues, or overlook differences in share classes that affect voting power. Investopedia guide

How to avoid them

Avoid these mistakes by reading company notices, confirming settlement deadlines with the exchange, and checking the official filing to learn the share class rules before acting.

Also, be cautious about third-party summaries and use primary documents for final decisions on taxation or timelines.

Practical scenarios: three short examples a beginner can relate to

Example A: choosing between common and preferred for income

An investor seeking steady income might compare preferred dividends, which can be stated or fixed, with common dividends that vary; the trade-off often includes limited voting or capped upside for preferreds. SEC guide on preferred stock

Next step: check the issue terms and dividend record before deciding if the instrument matches your income needs.

Example B: responding to a rights issue

A shareholder receives a rights offer at a discount; the choices are to exercise if you can fund the purchase, sell the rights if allowed, or let them lapse and accept dilution. FT explainer

Simple next step: open the offer circular, confirm the exercise deadline, and run the rights checklist to decide while the offer is live.

Example C: receiving bonus shares

After a bonus issue you will see more shares on your holding statement but your percentage ownership is usually unchanged; confirm the record date and the exchange settlement notice for when the new shares appear. UK Government guidance See Investopedia on bonus issues.

Action to take: check the company notice and your broker’s posting to ensure the bonus shares are reflected correctly on your account.

How to check the facts: a quick verification checklist before you act

Documents and pages to open

Open the company notice, the offer circular for rights, and the exchange or regulator circular for settlement instructions and deadlines; these are the primary documents that state your options and timelines. SEBI circular

Also check company filings for share class details and the registrar page for updated holding statements.

Who to contact for official answers

Contact the company registrar for holding statement queries, the exchange for trading and settlement procedures, and a local tax advisor for tax treatment questions.

If a notice is unclear, rely on the official documents rather than social media or unverified summaries.

Mini glossary of useful terms

Short definitions you can refer back to

Common share: an ownership claim that usually includes voting rights and variable dividends.

Preferred share: a share with stated or fixed dividends and priority in some claims but often limited voting.

Dividend: a distribution of profit to shareholders, which can be variable or fixed depending on the share type.

Dilution: the reduction in ownership percentage when new shares are issued and you do not buy more.

Bonus shares or scrip: shares issued from reserves to existing shareholders, increasing share count but not changing immediate proportional value.

Rights issue: a time-limited subscription offer to existing shareholders to buy new shares, often at a discount.

Short checklist: what to do next if you own or are offered shares

Immediate steps

If you are offered shares in a rights issue, decide whether to exercise, sell rights, or let them lapse after comparing price and your funding ability.

Follow-up tasks

Record where you found authoritative documents, consult the exchange circular for settlement details, and consider a tax advisor if tax treatment is unclear.

Keep a simple log of deadlines and the documents you reviewed for future reference.

Wrap-up: the main points to remember

Key takeaways

There are four share categories beginners commonly meet: common shares, preferred shares, bonus or scrip shares, and rights issues; each differs on voting, dividends, priority, and dilution. Investopedia guide

Before acting, verify settlement timelines and tax rules locally using regulator and exchange circulars, and use a short checklist to match share types to your goals. For tax-aware strategies see our tax-efficient investing guide.

Where FinancePolice can help next

FinancePolice offers plain-language explainers and checklists to help readers decode company notices and compare common approaches to investing. Find more in our advanced ETF trading strategies.

Use this guide as a starting point and consult primary regulator sources or a tax advisor for country-specific questions.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.