The pie analogy from our last article was missing, among a few other things, the fact that there isn’t just one type of share people can buy. Most if not all companies offer these different types of shares which vary in exclusivity, rights, and conditions. This article is going to give a brief breakdown into the 2 broad categories of shares out there.
Equity Shares
More widely known as “common stock”, equity shares are the ordinary ones so to speak. They entitle the shareholder the right to vote on corporate policy and members of the board of directors. Although a right to receive dividends - a distribution of profits to the shareholders - are also usually included in the deal, that doesn’t necessarily mean that the payment is guaranteed. The reason is because other shares are of greater concern in this regard, namely…
Preferential Shares
These, as the name suggests, give the shareholder special treatment. In addition to the rights given to equity shareholders, preferential shares come with receiving dividends first, including in the event of liquidation. This means that if the company goes bust and ends up having to sell off everything they have, preferential shareholders will get to pocket some of that (which is usually why equity shareholders get nothing in these sorts of situations).
Not only are the dividends of priority, but they’re also a fixed amount, in that the holder receives a specified percentage that they will earn. As for voting, while it’s true that almost all preferential shares are nonvoting, it’s entirely possible for a shareholder to have voting rights even on extreme decisions, such as whether or not to acquire a company.
Preferential shares can actually be further divided into 8 sub-categories:
Cumulative and non-cumulative preference shares
As if ordinary preference shares weren’t enough, cumulative preference shares give the shareholder an even higher priority when it comes to dividends, namely being entitled to the arrears of dividends before anyone else. Remember that dividends are shares of profits. Sometimes, however, a company makes either too little or no profit and thus can’t pay dividends. But if you’re a cumulative preference shareholder, then fear not, for your missed dividends will be paid off next time (in addition to the dividends you’re entitled to receive in the future). Unfortunately, non-cumulative shareholders don’t enjoy such benefits.
Participating and non-participating preference shares
On the flip side of the coin, what happens if a company is exceptional? What if their profits exceeded all expectations? Well then, participating preference shareholders are in luck, for they are entitled to receive surplus profits as well as their fixed dividends rate. Sadly, non-participating holders are not invited to the party. Cope!
Convertible and non-convertible preference shares
This one’s fairly straightforward - convertible ones can be converted into good ol’ equity shares, whereas non-convertible can only remain as such.
Redeemable and irredeemable preference shares
Just because someone buys shares from a company doesn’t mean they’ll want to keep them until the end of time, and so they’ll want to make sure that they’re buying redeemable preference shares. These can be repurchased by the company at either a fixed price at a later date or if the shareholder negotiates a buyback sometime in the future. Irredeemable preference shareholders, on the other hand, cannot sell their stock back to the company.
And that is about as simple as we can make it. Believe it or not, there are actually many other types of shares out there, such as deferred shares (the lowest of the low in terms of priority during bankruptcy) or putable preferred stocks (the more extreme version of redeemable shares, in that the company must sign a contract detailing their buyback), but these are really specific ones that are well beyond the scope of a “brief breakdown.”
Some of you may be wondering exactly why there are so many specific shares for every possible scenario. Wouldn't it be easier for everyone if we just had like, 2 or 3 types? It may be, but it misses the point. Public companies have several shareholders putting in varying amounts of funds into the firm, ranging from casual day traders looking for some extra money to million-dollar hedge funds who are looking to take the stock another digit.
Some, such as angel investors, are naturally going to be more involved with the company and thus want hefty bonuses. But others may not be so keen on that and would instead just opt for some nice little perks, hence creating different shareholder needs that must be addressed. So equity shareholders need not be jealous per se of preferential shareholders - them receiving all those goodies isn’t personal, it’s just business (usually).
Econ IRL
In the world of developmental economists, a general rule of thumb is that more people working in a country’s manufacturing sector means industrialization which means economic growth. The labor force transitions from working farms to working in factories, exponentially increasing their output per hour of work. As demonstrated in this week’s paper, among the benefits that come along with industrialization, an important one is employment, namely it being increased.
However, Africa is missing out on that particular gain. While manufacturing employment has indeed rapidly risen in the past 20 years, it doesn’t appear to be as powerful a job creator as it was in the past. The researchers identify 2 main reasons for this:
Political instability: electoral violence in Kenya, for example, reduced exports by about 50%, with worker absence being largely responsible. Violence and uncertainty obstruct markets and growth on 2 fronts: reducing the population’s labor force and interfering with businesses’ operations.
Capital-intensive manufacturing: automation technologies favour machines over humans, which makes it difficult for low-skilled workers especially to prove themselves the better option over the robot and land themselves a job
These 2 factors are the primary ones lessening the African manufacturing sector’s potential for employment. When considering that the standard growth solution recommended to Africa was to increase manufacturing, economists should rethink their policy prescriptions pertaining to the continent's growth.
‘Till next time,
SoBasically