12UBMN01

II.1. Share and Its Types, Primary and Secondary Market

Objective& Student’s Outcome
To teach the meaning of shares and its types, primary and secondary market of stock exchange
and types of speculation
Purpose & benefit to the students
To know about the meaning, definition of shares and its types, primary and secondary market of
stock exchange and types speculation.
Prior Assignment
Collect the details about different types of shares using the private and public company and
primary and secondary market (or) ethics in share marketing field in district or national level
Prerequisite /prior knowledge
To know about different types of shares, what are the rules and regulation of primary and
secondary market and types of speculators
Actual content
Meaning of share:
Total capital of the company is divided into units of small denomination. One of the units
into which the capital of the company is divided is called a share.
Kinds of Shares
According to the Companies Act, 1956 a company can issue only two types of shares
viz., 1. Preference shares 2. Equity shares.
Types of shares
Preference Shares Equity Shares
1. Cumulative preference shares.
2. Non-Cumulative preference shares.
3. Participating preference shares.
4. Non - Participating preference shares.
5. Convertible preference shares.
6. Non - Convertible preference shares.
7. Redeemable preference shares.
8. Irredeemable preference share.

Page 1 of 7
 12UBMN01

I. Preference Shares
The term preference shares focus certain preferential rights over other types of shares.
They are,
i). A preferential right to get a fixed rate of dividend during the life of the company. It means that
only after payment of dividend to preference shareholders, the surplus, if any, can be used for
paying dividend to equity shareholders.
ii). A preferential right to the return of share capital at the time of winding up of the company.
This means that when the company goes into liquidation, after discharging debts due to
outsiders, the surplus assets must first be used for returning the share capital contributed by the
Preference shareholders. The remaining surplus alone will be enjoyed by equity shareholders.
Preference shareholders must carry both these preferential rights. However, preference
shareholders have certain disabilities. For instance, they do not normally enjoy voting rights.
However they get the right to vote.
1. any resolution affecting their rights
2. on all resolutions when dividend has not been paid to them for certain period as
prescribed in the Act.
Kinds of Preference Shares
Preference Shares are of different types based on differing rights. They are briefly
described below.
1. Cumulative Preference Shares
In case dividend is not declared, because of inadequate profit, the right to dividend for
that year does not lapse in the case of cumulative preference shares. Dividends not declared and
paid get accumulated so that they may be paid out of profits of subsequent years as arrears of
Dividend before any dividend is paid to equity shareholders. Preference shares are always
cumulative, unless the contrary is expressly stated in the Articles of Association.
2. Non Cumulative Preference Shares
In the case of non cumulative preference shares if dividend is not paid in any particular
year, it lapses. Dividend is not allowed to accumulate and such unpaid dividend will not be paid
in subsequent years even though sufficient profits are earned.

Page 2 of 7
 12UBMN01

3. Participating Preference Shares

In addition to the fixed rate of dividend, these shares carry a further right to participate
with the equity shareholders in the surplus profits which remain after paying a certain rate of
dividend to equity shareholders. Thus they get two kinds of dividend, one fixed rate and the other
changing every year depending on the level of excess profits.
Similarly such preference shares have a right to participate in the surplus assets of the
company on its winding up after paying in full the preference and equity share capital. The right
to participate in the surplus profits or surplus assets at the time of winding up is available to
preference shareholders only if it is specifically expressed in the articles. In other words
preference shares are presumed to be non-participating unless specifically stated otherwise
in the articles.
4. Non Participating Preference Shares
These shares are entitled to only a fixed rate of dividend. They do not participate either in
the surplus or in the surplus assets. In such a case, the entire surplus goes to equity shareholders.
If the articles are silent with regard to this right to participate in the surplus profit or surplus
assets, the preference shares will be considered to be only of non-participating type.
5. Convertible Preference Shares
Where preference shares entitle their shareholders to convert their preference shares into
equity shares within a specified period, they are known as Convertible Preference Shares.
6. Non-Convertible Preference Shares
Where preference shares cannot be converted into equity shares, they are called non-
convertible preference shares. Once issued as preference shares, they continue to be only
preference shares throughout the life time of the company without any change in their
characteristics. If the Articles are silent regarding this right to convert, the preference shares will
be considered to be only Non-Convertible Preference Shares.
7. Redeemable Preference Shares
If the Articles of Association authorize, a company can issue redeemable preference
shares. It means, that the capital raised by means of these shares can be returned after a specified
period or at any time at its options after giving notice as per terms of issue. These shares can be
redeemed either out of profits or out of the proceeds of a fresh issue of shares. Redeemable

Page 3 of 7
 12UBMN01

preference shares can be redeemed if they are fully paid-up. A company cannot convert existing
preference shares into redeemable preference shares.
8. Irredeemable Preference Shares
Any preference share that cannot be redeemed during the lifetime of the company is
known as irredeemable preference Shares.
II. Equity Shares
Equity shares are those, which are not preference shares. They were also known as
ordinary shares. They are entitled to get dividend only after the fixed rate of dividend is paid to
preference shareholders. Similarly at the time of winding up of the company, only after returning
preference share capital in full, and if there is any surplus, it will be paid to equity shareholders.
PRIMARY MARKET AND SECONDARY MARKET:
1. PRIMARY MARKET (New issues market)
Primary market’ denotes the market for new issues. It has no physical existence. It is
concerned with the floatation and issue of new shares and debentures by new or existing
companies. The shares are offered to the public. The primary market establishes a linkage
between the companies raising finance and the investing public. To make new issues, companies
are assisted by brokers, underwriters or commercial banks, in general. The public, who are
interested in subscribing for the shares of the company must submit an application form. The
forms will be available with the brokers, underwriters, etc.
The investing public invests their saving in securities for varied reasons. They should be
able to dispose the securities, in case of need. Sale of securities is a specialised activity. Hence,
the companies issuing the securities should make use of the services of agencies/institutions who
are specialists in issue of securities.
2. SECONDARY MARKET
The secondary market refers to the market where the securities issued in the primary
market are traded. The secondary market depends on the primary market. More the number of
Companies makes new issues in the primary market, the greater will be the volume of trade in
secondary market. In India, the secondary market includes 21 regional stock exchanges, the Over
The Counter Exchange of India (OTCEI) and National Stock Exchange of India (NSE).

Page 4 of 7
 12UBMN01

SPECULATION
Speculation refers to the buying and selling of securities in the hope of making a profit
from expected change in the price of securities. Those who engage in such activity are known as
‘Speculators’.
Trading Procedure on a Stock Exchange:
The Trading procedure involves the following steps:
1. Selection of a broker:
The buying and selling of securities can only be done through SEBI registered brokers
who are members of the Stock Exchange. The broker can be an individual, partnership firms or
corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf of
the investor or speculator.
2. Opening Demat Account with Depository:
Demat (Dematerialized) account refer to an account which an Indian citizen must open
with the depository participant (banks or stock brokers) to trade in listed securities in electronic
form. Second step in trading procedure is to open a Demat account. The securities are held in the
electronic form by a depository. Depository is an institution or an organization which holds
securities (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.) At present in India there are two
depositories: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository
Services Ltd.) There is no direct contact between depository and investor.
Depository interacts with investors through depository participants only.
Depository participant will maintain securities account balances of investor and intimate investor
about the status of their holdings from time to time.
3. Placing the Order:
After opening the Demat Account, the investor can place the order. The order can be
placed to the broker either (DP) personally or through phone, email, etc. Investor must place the
order very clearly specifying the range of price at which securities can be bought or sold. e.g.
“Buy 100 equity shares of Reliance for not more than Rs 500 per share.”
4. Executing the Order:
As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the
securities. Broker prepares a contract note for the order executed. The contract note contains the

Page 5 of 7
 12UBMN01

name and the price of securities, name of parties and brokerage (commission) charged by him.
Contract note is signed by the broker.
5. Settlement
This means actual transfer of securities. This is the last stage in the trading of securities
done by the broker on behalf of their clients. There can be two types of settlement.
(a) On the spot settlement:
It means settlement is done immediately and on spot settlement follows. T + 2 rolling
settlement. This means any trade taking place on Monday gets settled by Wednesday.
(b) Forward settlement:
It means settlement will take place on some future date. It can be T + 5 or T + 7, etc. All
trading in stock exchanges takes place between 9.55 am and 3.30 pm. Monday to Friday.
KINDS OF SPECULATORS
There are four types of speculators who are active on the stock exchanges in India. They
are known as Bull, Bear, Stag, and Lame Duck. These names have been derived from the animal
world to bring out the nature and working of speculators.
 Bull
A Bull or Tejiwala is an operator who expects a rise in prices of securities in the future.
In anticipation of price rise he makes purchases of shares at present and other securities with the
intention to sell at higher prices in future. He is called bull because just like a bull tends to throw
his victim up in the air, the bull speculator stimulates the price to rise. He is an optimistic
speculator.
 Bear
A bear or Mandiwala speculator expects prices to fall in future and sells securities at
present with a view to purchase them at lower prices in future. A bear does not have securities at
present but sells them at higher prices in anticipation that he will supply them by purchasing at
lower prices in future. A bear usually presses its victim down to ground. Similarly the bear
speculator tends to force down the prices of securities. A bear is a pessimistic speculator.
 Stag
A stag is a cautious speculator in the stock exchange. He applies for shares in new
companies and expects to sell them at a premium, if he gets an allotment. He selects those

Page 6 of 7
 12UBMN01

companies whose shares are in more demand and are likely to carry a premium. He sells the
shares before being called to pay the allotment money. He is also called a premium hunter.
 Lame Duck
When a bear finds it difficult to fulfill his commitment, he is said to be struggling like a
lame duck. A bear speculator contracts to sell securities at a later date. On the appointed time he
is not able to get the securities as the holders are not willing to part with them. In such situations
he feels concerned. Moreover, the buyer is not willing to carry over the transactions.
Key Words

Preference and equity shares, lame duck, bull, bear, settlement of shares, Tejiwala, Mandiwala.

Area of application
1. Primary markets
2. Secondary markets
3. Stock exchange, brokers and underwriters.
Assessment & Questions
1. Who are the speculators?
2. Explain the meaning of stock exchange?
3. What are the two kinds of shares?
5. Explain how to apply of shares?
6. Define primary and secondary market?
Post session assignment /Closure
1. What are the types of shares?
2. Explain primary and secondary market?
3. Who are the speculator
References, books
1. Company law – R.S.N. Pillai and bagavathi
2. Securities and portfolio management- punithavathi pandian
Web Sites
www. Google.com.
www.sharemarket.com
www.businessdictrionary .com

Page 7 of 7