At a Glance
- Preference shares offers an investment alternative with some characteristics of ordinary shares and corporate bond
- Preference shares can provide a higher yield from ordinary shares
- Unlike ordinary shares, preference shares issued by different companies may have varying terms and conditions, so research well to fully understand what you are investing in
Understand the Difference between Preference and Ordinary Stocks
When investing in a company, you commonly invest in ordinary shares, sometimes called common stock. Another asset class that you can invest in is called preference shares.
Companies issues preference shares when they require equity financing to strengthen their balance sheet, but without diluting the voting rights of existing shareholders.
Here are the common distinctions between the two different asset class:
| Characteristic | Preference Shares | Ordinary Shares |
|---|---|---|
| Dividends | Paid ahead of ordinary shares, typically in fixed amount | Paid based on company’s performance, not set in advance |
| Voting Rights | No voting rights | Voting Rights |
| Liquidation event (in the event company falls into bankruptcy) | Right of capital ahead of common stock holders | Right of capital after debtor and preference shares holder |
Do note that preference shares may be callable, which means the issuing company can buy back the shares at a future agreed date and price. These attributes of preference shares mimic the characteristics of corporate bonds.
Another feature of preference shares to note is that they may be “cumulative” or “non-cumulative”. For cumulative preference shares, the company will need to make up for any missed dividend payments, at the next period before any ordinary shares dividends are paid out. Non-cumulative preference shares will not have this feature and every dividend payment is treated as distinct.
Before investing in preference shares, you might want to learn more about the specific preference shares you are planning to invest in, since each company’s preference shares issuance might come with different terms and conditions.
Risks: This product introduction does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents, including the risk disclosures, which can be obtained from DBS Vickers. If you do not wish to seek financial advice, please consider carefully whether the product is suitable for you.
Investing in preference shares involves risks, including but not limited to economic, market, and liquidity risks. Preference shares are often non-voting and can be redeemable. Dividends may not always be declared and are often non-cumulative. To manage the risks, investors should keep abreast of economic and corporate developments and seek to understand the workings of such instrument and financial markets in general. To find out more, please contact our Investment Specialists.
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