Understanding preference and ordinary shares

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Preference shares vs ordinary shares - What is the difference?

Limited companies must have at least one shareholder; for many small businesses its only shareholders are its directors. However, it is possible to purchase shares in other companies and enjoy a portion of any profits. When buying equity shares in a company you can purchase these from two distinct categories: ordinary shares and preference shares. There are advantages and disadvantages to each which will be considered in more detail below.

Ordinary shares

Ordinary shares are sometimes known as ‘common stock’. Gives holders the right to vote at meetings as well as take dividends from the company’s profits. Voting rights mean you have a say on issues such as salaries and the future direction of the business. Although you do have the right to dividends when they are paid, companies are not obliged to distribute them should a decision be made to the contrary. This may be because profits are lower than expected, or because it has been decided that these profits are to be reinvested straight back into the business to fuel further growth instead.  

Preference shares

Preference shares come with no voting rights but they do provide an advantage over ordinary shareholders when it comes to receiving dividends. Preference shareholders are first in line for dividend payments, both when the business is operating, and also in the event of the company entering liquidation in the future. Dividend payments for preference shareholders are often at an agreed level and are made at defined points throughout the year. Due to this preference shares are often seen as a less risky investment, although payment amounts may be lower in light of this. Should the company experience a period of growth with profits to match, preference shareholders will not see the benefit in this when it comes to receiving their dividend payment. However, this works both ways, and many individuals investing in this way appreciate the element of certainty that comes with it.

Despite this, companies may choose not to make a dividend payment in certain instances. Even if you hold preferred stock, you will still not be able to receive a dividend payment if the company decides not to issue them. What happens in this situation depends on the type of preference share which is held.

Cumulative and non-cumulative preference shares

There are two main types of preference shares: cumulative and non-cumulative

If you are the shareholder of a company which is facing financial difficulty and you are concerned how this may affect your personal position, contact Real Business Rescue today. Our team of licensed insolvency practitioners will take the time to understand your situation and talk you through the options which are available to you and your company.