In two earlier articles, we defined and explained ordinary shares and preference shares. In this article, we will explain the difference between these two terms in finance.
Differences between Ordinary and preference shares
Point one: Ownership
Holders of ordinary shares are the true owners of a business. Holders of preference shares are not owners of the company but are classified as debtholders.
Point two: Annual Meetings
Common shareholders are invited to the annual general netting of a company. They may also allow a proxy to represent them at such meetings. Also, if there are extraordinary meetings, ordinary shareholders are invited to such meetings.
Preference shareholders are not allowed to attend such meetings. Therefore, proxies cannot represent this type of share.
Point three: Voting rights
Ordinary or common shareholders can vote at annual general meetings of the company in which they owned shares. Their voting rights are subject to the number of shares each shareholder possesses in the company.
A shareholder with 15 percent of the total shares of a company has more voting rights compared to another shareholder with 7 percent of the shares of that company.
But preference shareholders cannot vote in the meeting of shareholders in an event in which they are allowed to do so.
Voting right is used by companies to allow shareholders to decide on the company.
Point four: Income type
Holders of Ordinary shares received a variable income. This means that their income (dividend) varies from year to year. They may receive a 1 Dollar per share dividend this year and receive 3 Dollars per share in the coming year.
Holders of preference shares, on the other hand, received fixed income. Their dividend is usually fixed at a particular percentage. A 3% preference shares mean that 3 percent of the number of shares bought is paid as dividends every year.
Point five: payment of dividend
Common shareholders are paid dividends last. While Preference shareholders received dividends before holders of ordinary shares. This is the reason why they are referred to as preference.
Point six: Event of liquidation
If the company liquidates or stops operations, preference shareholders are paid their capital in full before the directors will pay that of ordinary capital.
In final words, shareholders that received preferences are paid a dividend and their capital amount first before common shareholders. However, they don’t enjoy the variable income, attend annual general meetings, and vote at those meetings.