Difference between Preference and Ordinary Shares

Preference Shares

Preference shares are one of the financial instruments that a company uses to raise capital for their operations. They are the general exclusive share options that enable the shareholders of a company to get dividends before the equity shareholders when it gets announced. It also allows them to claim a special right to the dividends during the lifetime of the company, along with the option for claiming repayment of capital when the company winds up. Preference shares are seen as a hybrid security option simply because they represent the traits of both debt as well as equity investments. The capital that a company raises by issuing preference shares (to individuals and investors) is called preference share capital. The preference shareholders are also regarded as the owners of the company, like equity shareholders. The only difference, however, is that they do not have any voting rights.

Ordinary Shares

Ordinary shares are a financial instrument that organisations use to raise capital for their short term as well as long term operations. The shareholders (both individuals and organisations) have the right to vote and participate in the management of the company as well. However, they get the returns on their shares after the preference shareholders and only if a company makes a profit. They also have the last right to claim the repayment of capital in case the company goes into liquidation. Ordinary shares represent equity investments. The capital that an organisation manages to raise by issuing ordinary shares is known as equity share capital. Like the preference shareholders, the holders of ordinary shares are also the owners within the organisation.

Difference between Preference and Ordinary Shares

Both preference and ordinary shares allow investors to become part owners of the company. Organisations also prefer to raise capital through them as compared to the debt instruments. However, there are several points of difference between preference and ordinary shares, and we will discuss them in the table below:

Preference Shares

Ordinary Shares

Definition

Preference Shares are a financial instrument used by companies to raise capital that comes with the dividend option for shareholders.

Ordinary Shares are also a financial instrument used by companies to raise capital that comes with voting rights for the shareholders.

Rate of Dividend

The rate of dividend is fixed for preference shares.

There is no fixed rate of dividend for ordinary shares.

Voting Rights

Preference shareholders do not have any voting rights for taking crucial decisions related to the company.

Ordinary shareholders have voting rights for taking crucial decisions related to the company.

Bonus Shares

Preference shareholders are not eligible for getting any bonus shares from the company.

Ordinary shareholders are eligible for getting bonus shares from the company.

Role in Management

Preference shareholders do not have a role in the management of the organisation.

Ordinary shareholders have a role in the management of the organisation.

Arrears

Preference shareholders have a claim over the arrears of their dividends.

Ordinary shareholders do not have a claim over the arrears over their dividends.

Types of Shares

The different types of preference shares are mentioned below:

  • Cumulative preference share
  • Participating preference share
  • Redeemable preference share
  • Convertible preference share
  • Non-Cumulative preference share
  • Non-Participating preference share
  • Non-Redeemable preference share
  • Non-Convertible preference share

The different types of ordinary shares are mentioned below:

  • Authorised share capital
  • Issued share capital
  • Subscribed share capital
  • Paid-up share capital
  • Right share
  • Bonus share
  • Sweat equity share

Conclusion

Both preference shares and ordinary shares are extremely important for any company to raise capital for carrying out their business activities. Although there are many differences between the two, companies prefer to use both modes to finance their operations and ensure long term survival of their organisation.

Frequently Asked Questions

What are cumulative preference shares?

Cumulative preference shares are financial instruments that allow the shareholders to get the benefit of cumulative dividend payout when the company is not showing profits.

What is authorised share capital?

Authorised share capital is defined as the maximum amount that an organisation can ask from the investors for its share capital. The amount is subject to change based on the company’s recommendation and with the help of legal formalities.

What are convertible preference shares?

A convertible preference share is a type of preference share that can be converted into equity shares after the expiry of a fixed time period that is mentioned in a company’s memorandum of association.

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