Key differences between Preference Shares and Ordinary Shares

Guardian Funds typically buys Preference Shares in the Landowner company rather than Ordinary Shares. The following information provides some insights on the key differences between the two types of shares and explains why Preference Shares is the preferred option for our investments and more favourable for our investors.

While both preferred shares and common shares give shareholders ownership in a company, they come with different shareholder rights. Preference shares, also known as preferred shares, have the advantage of a higher priority claim to the assets of a corporation in case of insolvency and receive a fixed dividend distribution. These shares normally do not have voting rights and are non-cumulative and irredeemable during the investment term. These characteristics are explained further below.

Dividend Rights

Preference shares normally carry a right to a priority dividend as a fixed percentage. Fixed dividends allow the Preference shareholder to have more certainty over their investment as they receive their fixed dividend before the ordinary shareholders receive any dividend payment.

Whilst Ordinary Shares gives the shareholder the right to receive a share of the company’s profits through dividends, an ordinary shareholder’s dividends will fluctuate depending on the company’s performance and profits.

Furthermore, it is at the business’ discretion whether or not it decides to pay dividends and of what amount. Ordinary shareholders will only receive a dividend payment after the company pays dividends to Preference Shareholders.

Liquidation 

If a company can no longer pay its debts when they fall due, the company is insolvent. Accordingly, the business may proceed into liquidation.

During this liquidation process, the typical order of repayment is as follows:

• secured creditors;
• unsecured creditors;
• preferential shareholders; and
• ordinary shareholders.

Thus, Ordinary Shareholders will rank last when receiving any monetary sums from the company.

Voting Rights

An Ordinary Share gives the shareholder the right to vote on matters put before all the company shareholders. The weight of a particular shareholder’s vote usually depends on how much ownership they have, as a percentage, in the company. Typically, one share equals one vote.

On the other hand, Preference Shareholders do not have any rights to vote.