Differences Between Preference And Ordinary shares : A company is a registered entity under the Corporate Affairs Commission (CAC) by one or more person’s who run the company for the purpose of making profit. A company is usually formed when individuals come together to pool their resources together.
The resources contributed in the formation of the company is usually converted to a security known as Shares. Subject to the memorandum of Association of a company, such shares are classified into different types with special privileges attached to it. In this article, we will be looking at preference shares and ordinary shares in the light of their differences.
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Difference Between Preference And Ordinary Shares
1. DEFINITION: A Preference Shares can be said to be a financial instrument that is used by a company(irs) to raise the initial capital which normay comes with dividend option for the respective shareholders of the company. On the other hand, an Ordinary Shares is said to be a financial instrument utilized by a company(ies) in order to raise capital for the company which usually comes with it’s inherent benefits like voting right for the holders of such ordinary shares.
The above definition draws a subtle distinction between a preference share and an ordinary shares by showcasing that both shares entitled the holders different kind of rights and such other obligations as will be pointed out subsequently.
2. DIVIDEND: Another most important difference between a preference share and an ordinary shares is in the dividend. Dividend is said to be the amount proportionate to the Company’s net profit which is acrued to a shareholder in the order of priority, amount and preference of the shares held by such shareholders. So, it is important to point out that preference shareholders are entitled to a fixed dividend at any particular time dividend is declared by the company.
Notwithstanding the amount of profit realized at the end of a business session, the preference shareholders are only entitled to the amount fixed to their shares. Even though this may seem or appear limited, it had its inherent advantages as well. Ordinary Shareholders on the other hand are entitled to the net profit of the company that is declared at a particular time and such dividend is subject to variation (depending on the amount of profit made and the dividend declared).
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3. VOTING RIGHT: One of the thing or right invoked by a share in a company is the voting right. It is a powerful and influential right because, it can be judiciously used to determine and control how the Company runs. To this effect, the preference shareholders are deprived of this right because, the operating law governing the formation and approval of the company’s memorandum of Association provides that Preference shareholders do not have such rights to participate in the voting that elicit very crucial decision taking in the company.
This, by implication portends that the preference shareholders are not by any means allowed to control the activities of the company whereas, the ordinary shareholders who are also known as equity shareholders are entitled to such votes in accordance with the amount of shares held by such person. By implication, the ordinary shareholders are the ones who dictates most of the things being handled by the company.
4. LIMITATIONS: One thing about Companies and the interaction between staff, as well as how the Company transact with other people or corporation is that there are certain limitations on the degree of things that could be obtained. A good example is the fact that, in a case where the shareholders or the company wants to reward some very active members of the company or staff, the Company may decide to appreciate them by alotting bonus shares to such person.
Next is the fact that such bonus shares is only entitled to eligible person’s and such eligibility includes not being a member of preference shareholders. So, in a nutshell, a preference shareholder is not entitled to a Company’s bonus shares but the ordinary shareholders are entitled to such bonus shares.
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5. ADMINISTRATION OF THE COMPANY: As earlier mentioned, the preference shareholders are not entitled to engage in the administration of the company and this is because, the responsibility lies on ordinary shareholders who are entitled to vote in the event of taking crucial decision for the company.
Every company need to be properly managed by the appropriate personels however, the kind of shares held by such person reveals the eligibility of such persons to be in control, in this case, the law provides that the ordinary shareholders, by virtue of their voting rights are entitled to run the company.
6. CLAIMS: One of the advantages of preference shares and the rights it confers on the holders which differentiate it from ordinary shares is that, the preference shareholders are entitled to claims over arrears of their acrued dividends. This is simplified as follows; due to the fact that the preference shareholder’s dividends are usually fixed, their dividends are paid not minding the company financial status.
Notwithstanding the above, where the company had suffered financial setback and the dividend of the preference shareholders unpaid within such period, it is then moved forward and not annihilated by non-declaration of dividend so, in the subsequent year, the preference shareholders are entitled to lay claim over the acrued but unpaid shares. When it comes to ordinary shareholders, the terms and options are different because, once dividend is not declared by the company, the ordinary shareholder can not lay claim on it or anything else if such nature.
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7. PRIORITY: One of the eventualities of a company is the event if winding up at a particular time. Where a company winds up, the company begins to offset it’s debts and liabilities. One significant about it is that, in the event of winding up, priority is set and considered in offsetting the company debts.
It is on this ground that the preference shareholders are given priority over the ordinary shareholders because their shares are the company equity shares that is used to run the Company and no specific dividend attached to it.
8. ACCRUED AMOUNT PAYABLE: Another notorious difference between preference shares and ordinary shares is with the amount of capital or amount acrued to the shareholders in the even of winding up. In the even of winding up of the company, the preference shareholders are usually paid their full capital because it is more or less fixed.
They are given priority and their full capital is been paid before that of the ordinary shareholders would be considered.
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9. SURPLUS ASSET: Where there is surplus asset of the company to be shared after all debts had been successfully paid by the company, the next step is to share the surplus to the ordinary shareholders.
This is because, by law, they are the only ones that are entitled to such benefit except in a situation where the memorandum or article of the company stipulates that the preference shareholders are entitled to share in the surplus capital.
10. CATEGORIES OF EACH TYPE OF SHARE: Another major difference between preference shares and ordinary shares is in the types and category of these shares. Preference shares has the following category of shares; Redeemable preference share, cumulative preference share, participating and Non-Participating preference share, Non-Cumulative preference share, convertible and Non-Convertible preference shares and many others while the ordinary shares are of the following category; issued share capital, bonus capital, subscribed share capital, authorized share capital, paid up share capital, equity shares and many others.
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In conclusion, the floatation of a Company’s securities gives investors the opportunity to buy into the company through subscription of the company’s shares. It is important to know the category of shares held by a shareholder and the possible advantages as well as disadvantages of holding onto such category of shares.
Edeh Samuel Chukwuemeka ACMC, is a Law Student and a Certified Mediator/Conciliator in Nigeria. He is also a Developer with knowledge in HTML, CSS, JS, PHP and React Native. Samuel is bent on changing the legal profession by building Web and Mobile Apps that will make legal research a lot easier.