When trading in shares one must be aware of the types of shares, there are two major kinds of shares. Equity & Preference.
Equity shares: These shares are also known as ordinary shares, these shares do not enjoy any preferential rights regarding the payment of dividend & repayment of capital. Equity shareholders are paid their capital after the preference shareholders are paid. The rate of dividend on equity shares is not fixed. It fluctuates, as it depends on the profits made by a company i.e. higher the profits, higher the dividend, lower the profits, lower the dividend.
Preference shares: Preference shares are those shares which enjoy preference with regards to payment of dividend and repayment of capital. Preference shareholders have some preference over the equity shareholders, as in case of winding up of the company, they are paid their capital first. The rate of dividend on preference shares is fixed.
Preference shares are of two types:
1> Cumulative preference shares: In these kind of shares, if a company is unable to pay the dividend in the present year due to losses or any other problem, then the owner of the shares is eligible for the cumulative dividend next year i.e the dividend is added to the next years dividend.
2> Non cumulative preference shares: In these shares, if a company is not able to give dividends to the owners of shares due to loses or any other financial problem in the company, then the owner of such shares has no right to become eligible for receiving the dividend of the present year in future.