Here you will learn all about ordinary shares and preference shares, both of which are important to know. 

What are preference shares? 

Preference shares are like a combination between shares and bonds. They give priority to dividends, and sometimes also priority to capital in case of liquidation of the company. Risk-taking is normally low as investors have a good chance of getting their capital back no matter what happens. 

Key features of preference shares

• You receive a fixed dividend that is usually predetermined and works much like if the investment had a fixed interest rate. 
• If the company distributes money through dividends, holders of preference shares have the right to share in the money before investors who own ordinary shares. 
• Holders of preference shares normally have a lower voting right at general meeting compared to investors who own ordinary shares.  
• If the share price increases, 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 dividends rather than the growth of the company.

Advantages of preference shares

• You normally get a stable and predictable return on your investment.
• Risk-taking is lower compared to ordinary shares, especially if the company goes bankrupt.

Disadvantages of preference shares

• Limited returns if the share price increases. 
• If the company is in financial trouble, no dividend is normally paid, and as the value of preference shares is closely linked to dividends, this becomes problematic. 

What are ordinary shares?

Ordinary shares are the most common type of shares. Buying ordinary shares gives you a stake in the company, you can also receive dividends and vote at general meetings. 

Key characteristics of ordinary shares

• You are entitled to a dividend, but the amount of the dividend per share is determined by the company. 
• You have the right to vote at the general meeting and can therefore influence how the company will operate in the future. 
• The value of ordinary shares normally fluctuates more than that of preference shares because the value of ordinary shares is closely linked to the share price, which in turn is volatile.  

Advantages of ordinary shares

• You get a high return if the company's shares increase in value. 
• You are entitled to receive 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 their money, unlike holders of preference shares who are first in line to receive compensation from the bankruptcy estate. 
• The risk is higher compared to if you had preferred shares. 

Should you have ordinary shares or preference shares? 

Preference shares are best if you want a stable and predictable return, while ordinary shares are best if you are prepared to take a higher risk to get a potentially higher return. You can also combine ordinary and preference shares to spread your risks. 

Frequently asked questions

Are preference shares safer than ordinary shares?

No, both preference and ordinary shares have their own unique advantages and disadvantages. In general, preferred shares provide a more secure return while common shares provide a higher return if the share price of the company increases. 

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 to attract different types of investors. 

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 it is allowed to do so under the terms and conditions.