Ordinary Share vs. Preference Share

Attribute	Ordinary Share	Preference Share
Voting Rights	Yes	No
Dividend Priority	Last	First
Dividend Rate	Variable	Fixed
Redemption	No	Yes
Convertibility	No	Yes

Introduction

When it comes to investing in a company, shareholders have the option to choose between ordinary shares and preference shares. Both types of shares have their own set of attributes and benefits. In this article, we will compare the key differences between ordinary shares and preference shares to help investors make an informed decision.

Ownership Rights

Ordinary shares, also known as common shares, represent ownership in a company. Shareholders who hold ordinary shares have voting rights in the company's decision-making processes, such as electing the board of directors and approving major corporate actions. On the other hand, preference shares do not typically come with voting rights. Instead, preference shareholders receive fixed dividends before ordinary shareholders in the event of a company's liquidation.

Dividend Payments

One of the main differences between ordinary shares and preference shares is how dividends are paid out. Ordinary shareholders receive dividends based on the company's profitability and the decision of the board of directors. The amount of dividends can vary each year and is not guaranteed. In contrast, preference shareholders are entitled to fixed dividends at a predetermined rate. This provides preference shareholders with a more stable income stream compared to ordinary shareholders.

Risk and Return

Ordinary shares are considered riskier investments compared to preference shares. Since ordinary shareholders are the last to receive dividends and assets in the event of liquidation, they bear more risk. However, with higher risk comes the potential for higher returns. Ordinary shareholders have the opportunity to benefit from the company's growth and increased share value. On the other hand, preference shareholders have a lower risk profile due to their fixed dividends and priority in receiving payments. However, this also means that preference shareholders may miss out on potential upside if the company performs well.

Convertible Features

Preference shares often come with the option to be converted into ordinary shares at a predetermined ratio. This feature provides preference shareholders with the flexibility to switch to ordinary shares if they believe the company's growth prospects are favorable. On the other hand, ordinary shares do not have the option to be converted into preference shares. This convertible feature adds an element of versatility to preference shares that is not present in ordinary shares.

Liquidation Preference

In the event of a company's liquidation, preference shareholders have a higher claim on the company's assets compared to ordinary shareholders. This means that preference shareholders are more likely to receive their investment back before ordinary shareholders. The liquidation preference of preference shares provides an added layer of security for investors, especially in times of financial distress. Ordinary shareholders, on the other hand, are at the bottom of the priority list when it comes to receiving assets during liquidation.

Conclusion

In conclusion, both ordinary shares and preference shares have their own unique attributes and benefits. Ordinary shares offer ownership rights and the potential for higher returns, but come with higher risk. Preference shares provide fixed dividends, priority in liquidation, and convertible features, making them a more stable investment option. Ultimately, the choice between ordinary shares and preference shares depends on an investor's risk tolerance, income needs, and investment goals.