The difference between ordinary shares and preferred shares: types, comparative characteristics

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In the article we will consider what is the difference between ordinary shares and preferred shares. The latter are a financial instrument that is between ordinary shares and bonds. And if dividends are paid regularly, then such elements are somewhat reminiscent of paper with a variable coupon. And when they are not paid, they can be equated to ordinary shares.

What should you know about promotions?

Acquisition of securities implies that the investor buys not just a share, but a share in the company's business. Many people use the services provided by the mobile operators Megafon and Beeline, or refuel at the Lukoil gas station, buying groceries at Magnit. Why shouldn't investors receive a certain share of the profits of large organizations in which they themselves act as consumers? In addition, it is quite simple to do this, since, by receiving the company's securities,investors are en titled to enjoy certain dividends.

One can imagine that part of the funds that a person spent on talking on a mobile phone, gasoline or groceries will return to him as dividends that the organization pays out of profits. Thus, by purchasing a share, people buy a share in the company and have the full right to receive part of the profit that it generates in the course of its activities.

In our country today preferred shares of companies like AvtoVAZ, LUKOIL, Rostelecom, Sberbank, Surgutneftegaz, Tatneft are traded daily on stock exchanges. Next, we will consider what these financial instruments are in general, what is the difference between ordinary shares and preferred shares, and what they give to their holder.

Main differences

Shares can be ordinary and preferred, the difference between the two types is obvious:

• Ordinary shares give the opportunity to have a certain share in the company along with the right to receive dividends, as well as the ability to vote at the general meeting of shareholders. The specifics of holding an ordinary share is that the payment of dividends on it is not guaranteed.
• But preferred shares, unlike ordinary shares, give the holder the pre-emptive right to receive dividends, but you cannot vote at the meeting. In the event that a company decides to pay out business income, it is primarily received by the holders of preferred shares.
• In general, holderssuch securities also have the right to vote, but it is applicable only in certain cases. For example, when an organization has a loss, but there are no dividends. In such a situation, investors who have a preferred type of shares have the right to influence the management of the company in order to correct the negative situation.

What else is the difference between ordinary shares and preferred shares? When a company is at a loss for a long time and it is declared bankrupt, the holder of preferred securities has a priority right to receive part of the property of the liquidated company.

In those situations where companies have stable profits and pay dividends, preferred shares, unlike ordinary shares, are like bonds with variable coupons. The percentage of payments on them depends directly on profits in the future. It is worth emphasizing that this paper will not have a face value, and it also does not have a specific maturity date.

Continuing to compare preferred stocks, bonds and common stocks.

When are there no preferred payments?

Buying preferred shares does not mean guaranteed dividends. Payouts are canceled in the following two cases:

• Company's lack of profit. It is logical: there is no income, and the payment of dividends is also impossible, since they are paid out of the profit that the organization receives in the course of its operating activities. This is the main risk of investing inpreferred stock apart from the risk of bankruptcy of the company. Any legal aspects of the payment of dividends are regulated by the Charter of the company, which is publicly available, for example, on the issuer's website.
• The presence of problems with the payment of dividends, even if the organization has a profit. It is legally established that the institution cannot issue more than twenty-five percent of the total number of ordinary shares, therefore, there are more holders of ordinary securities. When the board of directors and holders of ordinary shares decide not to pay dividends, then, unfortunately, holders of the preferred form will not be able to receive them, which, perhaps, is wrong. Theoretically, the refusal to pay can occur over several years. The main task (if a person wants to consistently receive dividends) is to invest in those institutions that have historically paid them consistently and, in principle, have a strategy aimed at paying dividends.

To understand the difference between preferred and common shares, you need to know what types of these financial instruments exist.

Views

So, shares are divided into two types: ordinary and preferred. The former allow individuals to vote at the meeting, while the preferred ones provide fixed dividends. Many are interested in what types of ordinary and preferred shares are.

Varieties of preferred shares

The following types are also availablesuch papers:

• Non-cumulative. On them, in case of non-payment of dividends for the current year, they are not accumulated and the holders of these shares cannot count on receiving dividends in subsequent years.
• Inconvertible view. They cannot be exchanged for plain ones.
• With a stake. Shares en title holders of securities to receive additional dividends, in addition to those already provided.

Varieties of common shares

Common stocks are distinguished according to the following characteristics:

• By voting method.
• By the nature of the dividend payment.

Depending on the voting system, the following types of ordinary shares are distinguished:

• Subordinate commons give fewer votes than papers of the same par value.
• Many voices. They provide more votes than shares of the same denomination.

Depending on the nature of dividend payments, there may be such types of ordinary securities:

• Standard shares with floating dividends.
• Securities for which regular fixed funds are paid based on the results of the company's work for the year.
• Ordinary with deferred payments (money is paid after a certain date or upon reaching a specific amount of the company's profit).

Comparative characteristics

As part of identifying the difference between ordinary and preferred shares,points out the following:

• If dividends are not paid, then preferred shares may give voting rights.
• When an amendment to the articles of association is required or when it comes to reorganization or liquidation of an organization, the choice can be made by holders of all types of shares.
• In the event that there are many ordinary securities, the investor receives bonus rights.
• When a stable income is required, the preferred type is more profitable than the ordinary, but only when buying them for several years.

The price of ordinary shares is mainly formed according to exchange principles. The cost of preferred is usually taken at the level of local management decision. In general, securities of the first type may turn out to be a more profitable investment if the company's capitalization in the stock markets grows.

They are generally considered safe investments. An important nuance is that, according to the legislation of the Russian Federation, an institution is not en titled to place preferred securities when their par value is less than that established for an ordinary type.

The total share of preferred papers in the authorized capital of the organizations of our country should in no case exceed twenty-five percent. For the ordinary type, such restrictions are not established by law.

Which company shares to buy - ordinary or preferred?

Which stocks to buy?

If a person does not plan to influenceactivities of the organization, and a stable dividend yield is required, then it is necessary to choose preferred shares. The fact is that their payout is more stable and predictable. And the papers themselves are somewhat cheaper than ordinary shares. In addition, their price in the market may grow stronger. Given the purchase for several years, they are perhaps the best option. What else is the comparative characteristic of ordinary and preferred shares?

Preference of Preferred Stock

Such securities have a number of advantages for investors in the event that they are compared with ordinary ones:

• First of all, the owner of preferred shares is almost always guaranteed some return. They accrue a fixed profit, in contrast to the same ordinary ones, the dividends of which directly depend on the proceeds of the joint-stock company. True, the money is not paid out when the company has incurred losses during the reporting period.
• Secondly, funds for dividend payments are allocated to holders of advisory securities as a matter of priority. This means that the holder of preferred shares also has the right to be the first to receive a share of the property of a joint-stock company upon its liquidation, before it is divided among other owners.
• Shareholders will be able to obtain additional rights specified in the statutory documents of the institution. For example, they have the right to convert their preferred papers into ordinary papers under certain conditions.

Disadvantages of Preferreds

There are some disadvantages to owning preferred shares. So, the issuer can demand back the paper from the shareholder without explaining the reason, while fully compensating the damage with interest. Very often preferred type of shares do not give voting rights. That is, its owner is deprived of the right to choose and, thus, is deprived of the opportunity to participate in the process of managing a joint-stock company and cannot make decisions that are important for the company.

Another drawback is the fixed amount of dividends. Often, their value is indicated as part of the issue of securities of this type and does not depend on the size of the company's profit, which, in the event of an increase in business profitability, may entail a proportional decrease in income from these financial instruments.

Conclusion

Thus, some companies issue shares of two types at once. Sometimes ordinary shares are converted into preferred shares. The difference between them is that in the first case, the client is guaranteed the right to vote at the shareholder meeting, and no guarantee of payment of dividends is given, and in the second - exactly the opposite. It is better to find out the difference between ordinary shares and preferred shares in advance.