Difference Between Preference and Ordinary Shares

Staff Writer

November 24, 2023

What’s in the article?

A share—also referred to as stock—represents a portion of the company that is owned by shareholders in exchange for their financial support and contributions. These shares can either be fully or partially paid up and signify that a shareholder has partial ownership of the company, with shareholders ranging from individuals, companies, or limited liability partnerships.

What Are the Different Types of Shares?

The following are the different types of shares that shareholders can acquire:

  • Ordinary Shares: This is the most common type of shares. These grant shareholders voting rights but not rights to receive or demand any dividends. Those who own ordinary shares also receive less dividends compared to those who own other types of shares like preference shares. Depending on the company, ordinary shares can also be divided into different classes, with different benefits attached to each.
  • Preference Shares: The preferential shares grant shareholders the right to fixed dividends, a return of capital during the company’s liquidation, as well as priority to dividends over those with ordinary shares. 
  • Redeemable Preference Shares: These are shares that the company can buy back from the shareholder after a certain period of time or under certain conditions, allowing the company to have more flexibility when it comes to managing its capital structure.
  • Convertible Preference Shares: Convertible preference shares often give the shareholder rights to a fixed dividend for a certain period of time. Once this time has passed, the company or shareholder may choose to convert these preference shares into ordinary shares, which will allow the investor to benefit from potential capital gains and purchase ordinary shares at a cheaper price, or proceed with the preference shares. 
  • Treasury Shares: Treasury shares are the ordinary shares that the company retrieved from shareholders. The company is listed as the owner of these shares, but it’s not allowed to use these shares to vote in meetings or to demand any dividends. The total number of treasury shares that the company may own should not exceed 10% of the total number of ordinary shares issued. Any excess will have to be canceled or disposed of within 6 months.

What’s the Difference Between Preference and Ordinary Shares?

! Preference Shares Ordinary Shares
Voting Rights Shareholders may have limited or no voting rights. Shareholders have voting rights and can affect the company’s decision-making and governance.
Dividends Shareholders have a fixed or predetermined dividend rate and will be given greater priority over ordinary shareholders during the claiming of company profits. Shareholders receive dividends after all of the company’s other obligations, including payments to preference shareholders, are fulfilled. Payment to shareholders is discretionary.
Assets in Liquidation Shareholders have a preferential claim on the company's assets should liquidation happen. They are entitled to receive their initial investment, as well as any accrued dividends before ordinary shareholders. Shareholders have a residual claim on the remaining assets after all creditors and preferential shareholders have been paid.
Risk Shareholders’ benefit from capital appreciation is more limited and returns may not change depending on the company’s success and positive performance. Shareholders are more at risk when it comes to dividend payments and capital appreciation but are entitled to higher returns if the company performs well.

Preference or Ordinary: Which One is Better?

Both types of shares have their advantages, and the decision of which one to get will ultimately depend on what you, as a prospective shareholder, wish to gain from the company, as well as the role you wish to have. Possible events in the future, such as company liquidation and conversion of shares, should also be considered when choosing which one to get.

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