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Amidst the dynamic world of publicly traded companies, every share symbolises a fraction of ownership. Nonetheless, it’s crucial to understand that all stocks are not identical. Some come with an influential advantage – the ability to cast a vote.
These stocks are often known as voting shares. Picture yourself entering a room bustling with influential business leaders and key decision-makers, where your voice holds weight and influence. The influence of voting shares can provide significant advantages to investors. They offer more than just a financial investment – they provide access to the decision-making table.
Understanding voting shares can provide investors with exclusive access to the boardroom. Intrigued? Let’s embark on this journey to unravel the mystery of voting shares and their pivotal role in the corporate world. Welcome aboard!
What are voting shares?
Holders of voting shares can have a say in the company’s decision-making process. If you possess a voting share, you can voice your perspective on specific business matters and company policies.
Typically, for most companies, each voting share grants the holder One Vote. All things considered, your voting power is directly proportional to your shareholdings.
Nevertheless, not all shares provide this privilege. Some shares do not grant voting rights. Having a clear grasp of the distinction between voting and non-voting shares is essential for investors as they navigate the complexities of the stock market.
Non-voting shares can be referred to as both preference shares and Differential Voting Rights (DVR) shares, depending on the context.
While DVR shares are a type of preference shares, they are not the same as traditional preference shares. DVR shares typically come with different voting rights and dividend rights compared to traditional preference shares.
Voting shares examples – Case study
There is a distinctive combination of common shares and Differential Voting Rights (DVR) shares at Tata Motors, a prominent Indian automaker.
The voting shares of Tata Motors, like those of most companies, come with one vote per share, allowing shareholders to participate in the company’s decision-making process. These shares are listed and are trading at ₹978.75 as of April 22, 2024, with a 5-year return of 353.97%.
On the other hand, Tata Motors DVR shares are a special class of shares that offer fewer voting rights but higher dividends. These shares provide a 5% higher dividend yield compared to regular shares but come with fractional voting rights of 1/10th. These shares are separately listed and are and are trading at ₹645.30 as of April 22, 2024, with a 5-year return of 521.08%.
How do voting shares work?
Having grasped the idea of voting shares, it’s time to delve into their functioning. When people buy shares in a publicly traded corporation, they effectively become partial owners of that business. There are essentially two categories of shares. These include voting shares commonly known as ordinary shares; and preferred shares.
Some important differences between the two are as follows:
| Voting shares | Preference shares | |
| Voting rights | Common shares provide complete voting rights. | Preference shares offer restricted or no voting privileges. |
| Dividend structure | Common share dividends are variable and subject to change as a result of business profitability. | Preference shares have a set dividend rate. |
| Risk and return | Investing in common shares is riskier, but could pay off in the end. | Preference shares have reduced risk and consistent returns. |
| Investors’ focus | Investors holding common shares typically seek capital growth. | Investors holding preference shares aim for regular income. |
Voting shares benefits
Voting shares offer a variety of advantages.
- Stocks that allow shareholders to vote give them a voice in corporate affairs and make sure their interests are considered.
- They provide shareholders with the means to demand accountability from the company.
- They provide minority shareholders with the ability to protect their interests from being overridden by larger shareholders.
- They make it easier for shareholders to voice suggestions that could benefit the business.
Disadvantages of voting shares
There are certain limitations and potential downsides to voting shares as well.
- Risk in liquidation: Voting shareholders are disadvantaged in the unfortunate case of a company’s liquidation. Following bondholders and preferred stockholders, they get paid last. This means that common shareholders may not get anything.
- Unpredictable dividends: Ownership of voting shares does not necessarily ensure the receipt of dividends. Preferred shareholders usually receive regular dividend payments, whereas the dividends for voting shareholders rely on the company’s profits and may vary.
- Potential dilution of ownership: When a company chooses to issue a significant number of voting shares, it has the potential to reduce the ownership percentage of current shareholders. This may result in a diminished level of control over the company.
Bottomline
Voting shares hold a crucial position in corporate governance, giving shareholders a say in decisions and possible dividends.
However, they come with risks, including the last claim in liquidation and uncertain dividends. Understanding these aspects is crucial for informed investing.
FAQs
Yes, voting shares are typically the same as common shares. Common shareholders have the right to vote on key company decisions, such as electing the board of directors. However, not all common shares carry voting rights, and the specifics can vary by company. It’s important to read the company’s shareholder agreement or consult with a financial advisor to understand the exact rights associated with a particular share class.
The choice between preferred and common stock depends on an investor’s goals. Common stock offers voting rights and potentially higher returns through capital appreciation but comes with more risk. Preferred stock, on the other hand, provides a fixed dividend and priority during liquidation, but usually lacks voting rights. Therefore, risk-tolerant investors might prefer common stock, while those seeking stable income might opt for preferred stock.
Investors might buy non-voting shares for several reasons. Firstly, they often come with a higher dividend yield, providing a steady income stream. Secondly, they’re typically cheaper than voting shares, making them more accessible to investors. Lastly, for investors who are more interested in financial returns than in influencing company decisions, non-voting shares can be an attractive option. However, they do lack the voting rights that come with common shares.
A dividend is a payment made by a corporation to its shareholders, usually in the form of cash or additional shares. It’s a portion of the company’s earnings distributed proportionally among the shareholders. Dividends are typically issued on a regular schedule, providing a steady income stream for investors. However, the decision to issue dividends, their frequency, and amount can vary widely between companies.
Bonus shares are additional stocks issued by a company to its existing shareholders at no extra cost. They are distributed in proportion to the current shareholding. This is a way for companies to capitalise on their reserves or accumulated profits. The issuance of bonus shares increases the total number of shares, reducing the price per share, and making it more affordable for retail investors.