Ordinary vs. preference shares: What does the difference mean for you as an investor?
Ordinary vs. preference shares: What does the difference mean for you as an investor?
When you buy shares, you purchase a stake in a company – but not all shares are the same. Most investors are familiar with ordinary shares, yet some companies also issue preference shares, which come with special rights. The difference between the two can have a major impact on how you receive returns, exercise influence, and manage risk. Here’s an overview of what sets them apart and how to decide which type best suits your investment goals.
What is an ordinary share?
An ordinary share represents ownership in a company and gives you voting rights at shareholder meetings. You’re entitled to a share of the company’s profits through dividends, but these are not guaranteed – they depend on the company’s performance and the board’s decision to distribute profits.
Ordinary shares are the most common type of equity in the UK. They allow you to influence key company decisions, such as electing directors or approving annual accounts. However, they also carry higher risk: if the company goes into liquidation, ordinary shareholders are last in line to receive any remaining assets after creditors and preference shareholders have been paid.
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What is a preference share?
A preference share offers certain advantages, typically in the form of priority dividends or preferential treatment if the company is wound up. Preference shareholders are paid dividends before ordinary shareholders and may receive a fixed dividend each year, regardless of the company’s overall profit level.
On the other hand, preference shares usually come with limited or no voting rights. This means you have less say in how the company is run, but you gain a more predictable income stream. For this reason, preference shares can appeal to investors who value stability and income over control and growth potential.
Pros and cons of each type
Ordinary shares:
- Advantages: Voting rights and the potential for higher returns if the company grows.
- Disadvantages: Dividends are not guaranteed, and you rank last in the event of liquidation.
Preference shares:
- Advantages: Fixed or priority dividends, offering more stable returns. Preferential treatment if the company is wound up.
- Disadvantages: Limited or no voting rights. Less opportunity to benefit from significant share price increases.
Your choice between the two depends on your risk tolerance and investment objectives. If you want influence and the potential for long-term growth, ordinary shares may be the better option. If you prefer steady income and lower volatility, preference shares could be more suitable.
How does the difference affect your investment strategy?
When building your portfolio, consider how each share type fits your overall strategy. Ordinary shares are well suited to long-term investors who believe in a company’s growth prospects and want to participate in its decision-making. Preference shares, by contrast, can act as a stabilising element, particularly during periods of market uncertainty.
Some investors choose to hold both types to balance risk and reward. This approach can create a more resilient portfolio, combining the growth potential of ordinary shares with the income stability of preference shares.
What should you watch out for?
Before investing in preference shares, it’s important to read the company’s articles of association and share prospectus carefully. These documents outline the specific rights and restrictions attached to the shares – for example, whether the dividend is fixed, cumulative, or subject to deferral. Remember that preference shares are not risk-free: if the company faces financial difficulties, dividends may be postponed or cancelled.
For ordinary shares, be prepared for price fluctuations and the possibility of periods without dividends. However, if the company performs well, you could benefit from both rising share prices and increasing dividend payments.
Conclusion: Know your rights – and your risk appetite
The difference between ordinary and preference shares ultimately comes down to a trade-off between control and security. Ordinary shares give you voting power and the potential for higher returns, while preference shares offer more predictable income but less influence.
As an investor, it’s essential to understand your own priorities. Do you want to help shape a company’s future, or are you seeking a more stable, income-focused investment? The answer will guide you towards the share type that best fits your strategy – and help you build a portfolio that aligns with your financial goals.
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