Ordinary Shares vs. Preference Shares

Attribute	Ordinary Shares	Preference Shares
Ownership	Equity ownership in a company	Equity ownership in a company
Voting Rights	Usually one vote per share	May or may not have voting rights
Dividend Priority	Lower priority for dividend payments	Higher priority for dividend payments
Dividend Amount	Dividends paid based on company performance	Fixed dividend amount
Redemption	Cannot be redeemed	May be redeemable after a certain period
Conversion	Cannot be converted into other securities	May be convertible into other securities
Preference in Liquidation	No preference in liquidation	Higher preference in liquidation

Introduction

When it comes to investing in a company, there are various types of shares available for purchase. Two common types are ordinary shares and preference shares. While both represent ownership in a company, they differ in terms of rights, dividends, and risks. In this article, we will explore the attributes of ordinary shares and preference shares, highlighting their similarities and differences.

Definition and Characteristics

Ordinary shares, also known as common shares, are the most basic form of ownership in a company. Holders of ordinary shares have voting rights in the company's decision-making processes, allowing them to participate in electing the board of directors and influencing major corporate decisions. These shares also provide potential for capital appreciation, meaning that if the company performs well, the value of ordinary shares may increase.

On the other hand, preference shares, as the name suggests, come with certain preferences or advantages over ordinary shares. Holders of preference shares typically do not have voting rights, but they have a higher claim on the company's assets and earnings compared to ordinary shareholders. This means that in the event of liquidation, preference shareholders are entitled to receive their investment back before ordinary shareholders.

Dividends

One of the key differences between ordinary shares and preference shares lies in the payment of dividends. Dividends are the distribution of a company's profits to its shareholders. Ordinary shareholders receive dividends based on the company's profitability and the decision of the board of directors. The amount of dividend paid to ordinary shareholders may vary from year to year and is not fixed.

Preference shareholders, on the other hand, have a fixed dividend rate. This means that they receive a predetermined dividend amount, usually expressed as a percentage of the face value of the preference shares. The fixed dividend rate provides more certainty to preference shareholders, as they can expect a consistent income stream from their investment.

In case a company fails to pay dividends, preference shareholders may have the right to accumulate unpaid dividends, which can be claimed in the future when the company is in a better financial position. This feature provides an additional layer of security to preference shareholders.

Risk and Return

When it comes to risk and return, ordinary shares and preference shares also differ. Ordinary shares are considered riskier than preference shares due to their lower priority in terms of claim on assets and earnings. In the event of liquidation or bankruptcy, ordinary shareholders are the last to receive any remaining assets after all other obligations, including those to preference shareholders, have been fulfilled.

However, with higher risk comes the potential for higher returns. Ordinary shareholders have the opportunity to benefit from the company's success through capital appreciation. If the company performs well and its share price increases, ordinary shareholders can sell their shares at a profit.

Preference shares, on the other hand, offer a more stable and predictable return. The fixed dividend rate provides a consistent income stream, making preference shares attractive to investors seeking a steady source of income. However, preference shareholders may miss out on the potential for significant capital gains that ordinary shareholders can enjoy.

Convertible Preference Shares

Another type of preference shares worth mentioning is convertible preference shares. These shares give the holder the option to convert their preference shares into ordinary shares at a predetermined conversion ratio. This feature provides flexibility to investors, allowing them to benefit from potential capital appreciation if the company performs well.

Convertible preference shares are often seen as a hybrid instrument, combining the characteristics of both preference shares and ordinary shares. They offer the stability of fixed dividends while providing the opportunity to participate in the company's growth through conversion into ordinary shares.

Conclusion

In summary, ordinary shares and preference shares have distinct attributes that cater to different investor preferences. Ordinary shares provide voting rights and potential capital appreciation, but come with higher risk. Preference shares, on the other hand, offer a fixed dividend rate, higher claim on assets, and a more stable income stream, but lack voting rights and the potential for significant capital gains.

Ultimately, the choice between ordinary shares and preference shares depends on an investor's risk appetite, income requirements, and investment goals. It is important to carefully consider these factors and conduct thorough research before making any investment decisions.