Preferential Shares Vs Ordinary Shares

Preferential shares (also known as preferred shares or preference shares) and ordinary shares (also known as common shares or equity shares) are two common types of shares issued by corporations.

They have several significant differences:

Priority in Dividends:

Preferential shareholders have a priority claim on dividends. They are entitled to receive a fixed dividend amount before any dividends are paid to ordinary shareholders. This fixed dividend is typically expressed as a percentage of the face value or par value of the preferential shares.

Ordinary shareholders receive dividends after preferential shareholders have been paid. Their dividends are not fixed and can vary depending on the company's profitability and dividend policy.

Voting Rights:

In many cases, preferential shareholders do not have voting rights or have limited voting rights. They may only be able to vote on certain matters, such as changes that could affect their preferred dividend or liquidation preference.

Ordinary shareholders typically have full voting rights in the company, allowing them to participate in the decision-making process by voting on various corporate matters, including the election of the board of directors.

Risk and Reward:

Preferential shareholders have a lower risk compared to ordinary shareholders when it comes to receiving dividends because of their fixed dividend rate. However, they may not benefit as much from the company's growth or increased profitability.

Ordinary shareholders have the potential for higher returns through capital appreciation if the company's value increases, but they also bear more risk as their dividends are not guaranteed.

Liquidation Preference:

In the event of liquidation or winding up of the company, preferential shareholders are typically entitled to receive their initial investment (par value or more) and any unpaid preferred dividends before the remaining assets are distributed to ordinary shareholders.

Ordinary shareholders receive their share of the remaining assets after the claims of preferential shareholders and creditors have been satisfied. They are at the bottom of the priority hierarchy in a liquidation scenario.

Convertible Feature:

Some preferential shares may have a convertible feature that allows the shareholder to convert their preferential shares into a specified number of ordinary shares at a predetermined conversion ratio. This feature can provide the opportunity for preferential shareholders to participate in the company's equity upside.

Ordinary shares are not convertible into other types of shares.

Redemption Rights:

Some preferential shares may have a redemption feature, allowing the company to repurchase the shares at a predetermined price or on specific redemption dates.

Ordinary shares typically do not have redemption rights.

Cumulative Dividends:

Some preferential shares may have cumulative dividend provisions, which means that if the company does not pay the full preferred dividend in a particular period, the unpaid dividends accumulate and must be paid in the future before any dividends can be paid to ordinary shareholders.

Ordinary shares do not have cumulative dividend provisions.

It's important to note that the specific rights and features of preferential and ordinary shares can vary widely depending on the company's articles of incorporation, the type of shares issued, and the legal framework of the jurisdiction in which the company is incorporated.

Shareholders should carefully review the company's offering documents and shareholder agreements to understand their rights and obligations.