Introduction:
The capital of a company is divided into a finite number of small equal units. These units are shares. The share denotes the percentage of ownership in a company. When you buy a share in a company you are entitled and responsible for that portion of the share i.e., a shareholder is entitled to claim both profit and loss of a company’s capital. Shares can offer great help to a start-up in the generation capital/funding required for scaling. Buying shares online is the easiest and fastest method these days. Shares are majorly classified into two, namely “Ordinary Shares” and “Preference Shares”. These shares differ in rights and responsibilities which is discussed below.
Ordinary Shares
Ordinary shares are equity ownership units or equity shares of a company. These shares are generally issued to the founders of the company. Ordinary shares are also known as common shares or common stock. These shares give the shareholder the right to vote on any decision-making process for the company. They can choose the board of directors while taking part in an annual general meeting of the company. The ordinary shareholders are paid out of the profit of a company, there’s no limit to their earning. The shareholders of ordinary shares are not guaranteed a dividend. The amount varies on the performance of the company. The ordinary shareholders have to bear the risk of the company.
Preference Shares
Preference shares are equity ownership units that are issued to investors by a company. Preference shares are also known as preferred stocks. Preference shares portray characteristics of both equity and debt. These shares provide a safeguard to the investors by the method of issuing dividends and also considering them as a priority during insolvency. Priority in case of payment by clearing the accounts of preference shareholders before ordinary shareholders.
There are different types of preference shares:
Cumulative Preference Shares
When the performance of the company is not good and the company is facing loss, the company decides to not pay a dividend to the preference shareholders that year but instead pay double next year when the condition of the company is better,
Non-Cumulative Preference Shares
In a situation where the company decides not to pay a dividend to the shareholders for that particular year due to poor performance but the shareholders will only be entitled to the dividend of that year and the previous year’s dividend will not be added.
Participatory Preference Shares
The shareholders receive the fixed dividend every year and along with that, they receive incentives when the company achieves its goals.
Convertible Shares
A preference shareholder can change his chares from preference to ordinary by meeting few conditions listed. This gives the right to take part in the decision making process.
Redeemable Shares
These shares remain with the shareholder for a specific period of time and are returned to the company later on. The shareholder is rewarded according to the value of the shares after which that person shall no longer be a shareholder.
Difference Between Ordinary Shares and Preference Shares
Voting Rights
An ordinary shareholder enjoys the right to vote on all the matters relating to the policies and regulations of the company. The votes are counted according to the number of shares owned by the shareholder. In a normal circumstance, one share accounts for one vote. More weightage is given to the shareholder who holds a greater number of shares, as shares denote the percentage of ownership in the company.
On the contrary, preference shareholders generally do not have voting rights. They are given voting rights under exceptional conditions. Unlike ordinary shareholders, preference shareholders don’t have a say in decision making, they just have to agree and go ahead with what has been decided.
Dividend Rights
Ordinary shareholders receive a share of the company’s profit by the way of dividends. The dividend is the way through which a company distributes its profit to the shareholders. The amount received as a dividend varies or fluctuates in the case of ordinary shares. The company decides the amount to be paid and in certain circumstances, the ordinary shareholders are not paid. The company pays the ordinary shareholders only after paying all the preference shareholders first.
The preference shareholders also receive a share of the company’s profit as a dividend. The preference shareholders receive a fixed amount and are paid before ordinary shareholders. They have the right to priority dividends.
Liquidation/ Bankruptcy
In a situation where the company can no longer pay dues i.e., in a situation where the company is insolvent or bankrupt the first preference is given to preference shareholders. The preference shareholders are paid first and their investment amount is recovered first. This concept drives people towards being a preference shareholder as the investment money will be refunded before ordinary shareholders.
Ordinary shareholders will receive any amount at the end only after all the preference shareholders have received their refund. There is no guarantee that the company will pay or provide reimbursement for the ordinary shareholders. In the chain of receiving amounts after the insolvency of a company the ordinary shareholders always come last.
Convertibility
Preference shares can be converted into ordinary shares. Convertibility is the act of changing from one kind of shareholder to another. A preference shareholder can choose to become an ordinary shareholder. Ordinary shareholders don’t have the liberty of convertibility of shares. They cannot change the type of share they hold.
Conclusion
There is a number of differences between ordinary shares and preference shares. The difference mainly comes in voting, dividends and during bankruptcy. Ordinary shareholders have the advantage of having voting rights whereas, their position in dividends depend upon the performance of the company. Preference shareholders have security during liquidation and fixed dividends but no voting rights. Both types have their own advantages and disadvantages.
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