Ordinary Shares vs Preference Shares: What Are The Differences and Which One is a Better Option ?
Ever wonder the differences between Ordinary and Preference Shares ? Wonder no more by expanding your knowledge here!
By AZIZAM AZIZAN
The two types of shares are called “Ordinary Shares” and “Preference Shares,” respectively. Ordinary shares and preference shares vary from one another in terms of the features, advantages, and rights they give to their holders.
Let’s look at the various rights and privileges that come with them.
WHAT IS AN ORDINARY SHARE?
Ordinary shares are a company’s equity shares that denote equity ownership proportionally based on the number of stocks acquired and held. Ordinary shareholders have voting rights at a company’s annual general meeting, which means they will vote on issues including naming or dismissing directors, as well as merger and acquisition terms and agreements. These shareholders are therefore entitled to the company’s earnings and capital appreciation. Dividends paid by the corporation, on the other hand, are not set for ordinary shareholders, and it is common practise for newly operating businesses to avoid paying dividends in favour of reinvesting income back into the business. Ordinary shareholders are sometimes paying dividends only after all of the company’s liabilities have been resolved. Ordinary shares, on the other hand, cannot be converted into preference shares.
ADVANTAGES AND DISADVANTAGES OF ORDINARY SHARES
Advantages of Ordinary Shares
1. Since you own a portion of the company, you can receive dividends and
gains as the market value of the company stock rises. You would be entitled to get capital gains, which are a measure of the company’s value, if the company does very well and becomes more valuable. Similarly, if a company makes a profit from its operations, it can decide to benefit its common stockholders by giving individual dividends or payments in the form of cash or stocks.
2. You will be able to invest with limited liability if you use this form of investment. So whatever portion of your investment you have already made will be the only one that you will lose when they are liquidated. As a result, you won’t be thinking about losing more money than you put in.
3. If issues arise that are not related to a shareholder’s financial investment, you will not be held directly responsible. Only the company’s executives are at risk of facing the repercussions.
Disadvantages of Ordinary Shares
Ordinary share prices are volatile, especially for start-up companies, and their value can fluctuate without notice, making it difficult to assess their success even when the business is doing well. If the company goes bankrupt, the stock you own will most likely become worthless.
WHAT IS A PREFERENCE SHARE?
To collect money, companies sell Preference Shares. Preference shares are considered a unique security since they combine the advantages of both debt and equity capital. Preference owners are therefore entitled to dividend payments ahead of ordinary shareholders. One disadvantage is that they do not have the same voting rights as common shareholders.
ADVANTAGES AND DISADVANTAGES OF PREFERENCE SHARES
Advantages of Preference Shares
1. Preference shares have pre-determined dividends that must be paid to
investors before dividends are distributed to ordinary shareholders. Although dividends are only paid when the corporation makes a profit, certain forms of preference shares (known as cumulative shares) allow unpaid dividends to accumulate. All unpaid dividends must be remitted to preference owners until the company is no longer in the debt before any dividends can be paid to ordinary shareholders.
2. Preference owners have a higher claim on company assets in the event of bankruptcy and liquidation, which allows preference shareholding appealing to investors with a low risk tolerance. The company promises a dividend every year, but if it fails to make a profit and has to close down, preference shareholders receive higher compensation.
3. Preference shareholders have the option of exchanging their shares for a set number of ordinary shares. If the company’s valuation and equity continue to rise, this may be a beneficial choice.
Disadvantages of Preference Shares
1. The dividend rate on preference shares is set at the time of purchase and remains constant until the shares mature, which can take up to 30 years. It might seem to be a better value when compared to current bond rates, but if market interest rates increase, the price of your preference shares may fall as other assets become more appealing. If you buy a 4-percentage-point
preferred and market rates rise to 6%, investors can sell your preferred and buy the new, higher-yielding alternative.