Here you will learn all about what ordinary shares and preference shares are — two types of share that are important to understand well.
Preference shares are roughly a combination of shares and bonds. They give priority to dividends, and sometimes also priority to capital if the company is liquidated. The risk is normally low, as an investor has a good chance of getting their capital back whatever happens.
Key features of preference shares
- You receive a fixed dividend that is usually predetermined and works roughly as if the investment had a fixed interest rate.
- If the company distributes money as dividends, holders of preference shares are entitled to receive the money before investors who own ordinary shares.
- Holders of preference shares normally have lower voting rights at the general meeting than investors who own ordinary shares.
- If the share price rises, holders of preference shares usually have a limited right to share in that return. This is because the value of preference shares is linked to the dividends rather than to the company's growth.
Advantages of preference shares
- You normally get a stable and predictable return on invested capital.
- The risk is lower than with ordinary shares, especially if the company goes bankrupt.
Disadvantages of preference shares
- Limited return if the share price rises.
- If the company has financial problems, no dividend is normally paid, and since the value of preference shares is closely tied to the dividend, this becomes a problem.
What are ordinary shares?
Ordinary shares are the most common type of share. If you buy ordinary shares, you get ownership stakes in the company, and you also receive dividends and can vote at general meetings.
Key features of ordinary shares
- You are entitled to dividends, but the dividend amount per share is decided by the company.
- You have the right to vote at the general meeting and can thereby influence how the company will work in the future.
- The value of ordinary shares normally fluctuates more than that of preference shares, as the value of ordinary shares is closely tied to the share price, which in turn is volatile.
Advantages of ordinary shares
- You get a high return if the company's shares rise in value.
- You are entitled to dividends in the same way as if you held preference shares.
Disadvantages of ordinary shares
- If the company goes bankrupt, there is a high risk of losing your money, unlike holders of preference shares, who are first in line to receive compensation from the bankruptcy estate.
- The risk is higher than if you held preference shares.
Should you hold ordinary shares or preference shares?
Preference shares suit you best if you want a stable and predictable return, while ordinary shares suit you best if you are prepared to take a higher risk for a potentially higher return. You can also combine ordinary and preference shares to spread your risks.
Are preference shares safer than ordinary shares?
No, both preference and ordinary shares have their own unique advantages and disadvantages. In general, preference shares give a more secure return, while ordinary shares give a higher return if the company's share price rises.
Can investors with preference shares vote at the general meeting?
Yes, sometimes, but if so the voting power per share is very limited.
Can companies issue both preference and ordinary shares?
Yes, the same company can issue both preference and ordinary shares in order to attract different types of investor.
What is a redemption price for preference shares?
A redemption price is the price at which the company may buy back the preference shares, if this is permitted under the applicable terms.
