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.