Types of Employee Shares in a Joint Stock Company

Instructor: Martin Gibbs

Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.

Joint stock companies can offer many incentives for owners/employees to directly participate in the direction of the company. One option is the ownership of stock in the company. This lesson will highlight types of employee shareholder ownership.

Joint Stock Company

A joint stock company is a company that's owned by shareholders. Unlike a larger publicly-traded company, the total capital of the joint stock company is divided into shares; every member of the company has shares in the business. Members are called shareholders. An ordinary, everyday share of stock is often called a standard share, and it's the type of share any eligible buyer can purchase. We'll discuss other types further on.

In a joint stock company, there are any number of shares that can be distributed as part of company ownership. These include preference shares, bonus shares, rights shares, sweat equity shares, and employee stock ownership plans.

Another feature of joint stock companies is that they have limited liability. This is important because each shareholder is only responsible for his or her shares; if the company goes bankrupt, the shareholder only loses their investment (not any personal funds or resources).

Preference Shares

Preference shares, also called preferred stock, are special shares of stock. Dividends are paid out before any other common stock dividends are paid. If the company goes bankrupt, preferred stock shareholders are paid out first.

For example, preference shares are issued at 8%. This means that a dividend at the rate of 8% is paid out annually on the shares. However, this depends on the company making a profit during that year.

Preference shares come in several varieties: cumulative or non-cumulative; redeemable or non-redeemable, participating or non-participating; and convertible or non-convertible.

Cumulative or Non-Cumulative

If a company doesn't make a profit and dividends aren't paid for a given year, shareholders of cumulative shares are due arrears of the dividend before other dividends are paid. It's like a reverse past-due notice for the shareholder; the company is liable for paying back the dividends.

For non-cumulative shares, the company doesn't have to pay back any arrears or past-due dividends.

Redeemable or Non-Redeemable

A redeemable preference share can be returned to the shareholder anytime during the company's existence. Non-redeemable shares can only be paid back when the company is sold or liquidated.

Participating or Non-Participating

In a participating preference share, you not only get a fixed dividend rate, but a portion of surplus profits that remain after dividends are paid out to all shareholders. Non-participating shares don't enjoy this benefit.

Convertible or Non-Convertible

A convertible preference share can be converted to a standard share; non-convertible shares cannot.

Bonus Shares

A bonus share is a freebie: A certain proportion of shares are issued to existing shareholders. For example, a 3 for 1 bonus means shareholders get two FREE shares for each share they already own.

This sounds like a free lunch but it isn't. The money comes from a company's reserve of profits. It's a little like preferred stock, except it doesn't require the ongoing dividend investment. It can be a nice one-time benefit to shareholders in recognition of a profitable year.

Sweat Equity Shares

The term sweat equity often refers to the brains and brawn investment in a project, such as remodeling a kitchen yourself, planting a garden, or paving a driveway. In terms of stock ownership, the concept is quite similar.

Sweat equity shares are standard shares of stock issued by a company to directors or employees. They are given out either at a discount or in exchange for intellectual property rights or value added to the company. Hence, the term sweat equity. Sweat equity options are good to foster innovation and productivity; compensation is not necessarily monetary, but shares of stock can be a great benefit.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account