What is a share? A share is the smallest unit, into which the capital of the company is divided. It is a right to a specified amount of the share capital of the company carrying with it certain rights and liabilities. It is a right to participate in the profits made by company. It is a movable property. It is not a sum of money but a bundle of rights and liabilities; it is an interest measured by sum of money. There are two kinds of shares; Ordinary shares and preference shares. Lets understand these shares and the differences between them.
What are ordinary shares? Ordinary shares are also called “equity shares”. These shares are traded in the stock market. These are the most common type of shares and are standard shares with no special rights or restrictions. They have the potential to give the highest financial gains but also have the highest risk. Ordinary shareholders are entitled to the voting right, however, they are the last to be paid if the company is wound up. All corporations must have ordinary shares as part of their stocks or someone has to be the owner of the corporation. Shareholders of these shares can participate in the management of the company. Read more about ordinary shares here.
What are preference shares? Preference shares commonly known as preferred shares are a company’s stock with dividends that are paid to shareholders before ordinary share dividends are given. If the company gets bankrupt, preferred shareholders are entitled to be paid from company assets before ordinary shareholders. Preference shares have a fixed dividend, but ordinary shares do not. Preferred shares shareholders do not have any voting rights, but ordinary shareholders do.
Type of preference shares
- Participating Preference Shares
- Non-Participating Preference Shares
- Convertible Preference Shares
- Non-Convertible Preference Shares
- Cumulative Preference Shares
- Non-Cumulative Preference Shares
Ordinary Shares vs. Preference Shares
Point of Difference
1. Face value
The face value of ordinary share is generally low.
The face value of preference share is generally high.
The dividend is paid to ordinary shareholders after paying dividend to all shares.
Preference shareholders get a fixed rate of dividend before ordinary shareholders.
3. Voting rights
Ordinary shares get all the voting rights in a company.
No voting rights under normal conditions. They gey voting right when dividend is not paid for two years.
The ordinary shares attract bold and adventurous investors.
The preference shares attract cautious and conservative investors.
The ordinary shareholders are the primary risk bearers of the company.
The risk involved in preference shares is relatively low.
6. Refund of capital
At the time of winding up the ordinary shareholders are refunded only after preference shares are paid.
At the time of winding up preference shares get priority over ordinary shares for refund of the company.
The ordinary shares are never redeemed or paid during the lifetime of the company.
Preference shares may be redeemed on expiry of a fixed period of time or at the option of the company.
Key Differences between Ordinary shares and Preference shares
- Right to vote: The ordinary shareholders carry the “right to vote” but on the other hand the preference shareholders do not have that right.
- Certainty Element: The rate of dividend for the ordinary shares completely depends on the profit of the company but for the preference shareholders the rate for dividends is consistent hence they come with certainty.
- Convertibility: Ordinary shares cannot be converted into preference shares if wished but the preference shares can be converted into ordinary shares.
Both types of shares have their advantages and disadvantages. They have their unique appeal depending upon the investor’s goals. If you are a profit-oriented investor then the preference shares will be a good option for you because they come with the priority to receive dividends but if you want to participate in the company’s decisions and meetings then the ordinary shares will be the one for you. What do you think, which share is more beneficial and is more reliable? Which one will you choose when it comes to investing?