The various types of shares
Even though we talk about shares in day-to-day life as if they were all the same, there is not just one type of share, but rather a whole range of them. They differ from one another in various ways. We give you an overview.
A distinction is made between bearer shares, registered shares and registered shares with restricted transferability.
The usual type of share is the bearer share. This is a security which makes its owner a shareholder. It can be traded quickly and informally. The associated rights (for example the right to vote at a general meeting) remain with the relevant holder and can be passed on to another holder simply by transferring the security. Registered shares, as the name suggests, are issued to a specific person. They can be transferred to another person by means of an endorsement. This is a written declaration which registers the transfer. The new owner can then be entered into the company’s share register and thereby exercise their membership rights (for example participation in the general meeting). Registered shares with restricted transferability are a special case: before they can be transferred to a new holder, the company must approve the change. This allows companies to protect themselves from falling into the hands of unknown investors or from selling shares to rivals.
A distinction is made between ordinary shares, preference shares and participation certificates.
Another difference is whether or not voting rights are granted upon acquisition of a share. Each ordinary share is associated with one voting right. The owner of an ordinary share may vote at the general meeting and have a say in the running of the company. They are also entitled to receive any dividends which are paid out. Ordinary shares are the most common type of share in Europe. In most cases, owners of preference shares receive a slightly higher dividend payout. However in many countries (for example Germany or the US) they do not have any voting rights. In Switzerland preference shares are quite rare and owners of preference shares are often even at an advantage in terms of voting rights. For example they have disproportionately greater voting powers than the owners of ordinary shares. The exact rights are set out in the company’s articles of incorporation. In Switzerland there are also participation certificates. These are associated with the same proprietary rights as shares, but participation certificates do not carry voting rights. Holders are however entitled to receive dividends.
If a private limited company issues new shares, these are referred to as primary shares. This applies in the event of a capital increase, for example. The shares which existed before the capital increase are referred to as secondary shares. By issuing primary shares there are now more units in total. This reduces (“dilutes”) the proportion of the company held by the owners of secondary shares. As compensation they receive subscription rights for primary shares.
Each individual company determines which type of share it wants to issue − different types are more suitable depending on the purpose for which the share capital is required. It is up to the relevant company to decide whether to treat all shareholders equally or whether to issue different types of securities to different shareholders. It may even issue different types of shares at the same time.