What is the Difference Between Ordinary Shares and Preference Shares?

The main difference between ordinary shares and preference shares lies in their voting rights, dividends, priority in case of liquidation, and risk. Here is a detailed comparison:

1. Voting Rights:

• Ordinary shares (also called common shares) typically come with voting rights, allowing shareholders to participate in decision-making processes such as electing the board of directors, approving significant decisions, and voting on other matters that require shareholder approval.
• Preference shares may or may not come with voting rights, depending on the terms of the share issue. In some cases, preference shareholders may have no voting rights or limited voting rights.

1. Dividends:

• Ordinary shares receive dividends only after all preference shareholders have received their payments.
• Preference shareholders usually receive payments before ordinary shareholders, but this isn't always guaranteed. Dividends for preference shares are set at a specific rate, but owning preference shares does not guarantee dividend payment. Preference shares can be cumulative or noncumulative, which affects how outstanding dividends are handled.

1. Priority in Case of Liquidation:

• In case of insolvency, preference shares have a higher priority claim to the assets of a corporation compared to ordinary shares.
• Ordinary shares have a lower priority for company assets and only receive dividends at the discretion of the company.

1. Risk:

• Preference shares offer a more stable source of income as they come with a fixed dividend and have priority in case of liquidation.
• Ordinary shares are generally considered to have a higher risk compared to preference shares due to their lower priority for company assets and dividends.

In conclusion, both ordinary and preference shares represent ownership in a company, but they have significant differences in voting rights, dividends, priority in case of liquidation, and risk. Companies should carefully consider these factors when deciding which type of share to issue, and investors should evaluate the risks and rewards of each type of share before investing.

Comparative Table: Ordinary Shares vs Preference Shares

Here is a table comparing the differences between ordinary shares and preference shares:

In summary, ordinary shares usually come with voting rights and are generally issued to founders and employees, while preference shares may not have voting rights and are often issued to investors. Preference shares provide a more stable source of income and have priority in case of liquidation, making them a less risky investment compared to ordinary shares.