In the article, we will examine what is the difference between ordinary shares and preferred ones. The latter are a financial instrument that is located between ordinary shares and bonds. And if dividends are paid regularly, then such elements somewhat resemble paper with a variable coupon. And when they are not paid, they can be equated to ordinary shares.
What should you know about promotions?
The acquisition of securities implies that the investor is not just buying a share, but a share in the business of the company. Many people use the services provided by the mobile operators Megafon and Beeline, or refuel at Lukoil's gas station, buying products at Magnet. Why should investors not 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, when receiving the company's securities, investors have the right to use certain dividends.
One can imagine that part of the funds that a person spent on a conversation on a mobile phone, gasoline or products, will return to him as dividends that the organization pays out of profit. Thus, when purchasing a share, people buy a share in the company and have every right to receive part of the profit that it generates in the course of business.
Today, in our country, preferred stocks of companies like AvtoVAZ, LUKOIL, Rostelecom, Sberbank, Surgutneftegaz, and Tatneft are daily traded on exchanges. Next, we consider what these financial instruments generally are, what is the difference between ordinary and preferred shares, and what they give to their holder.
The main differences
Shares can be ordinary and preferred, the difference between the two types is obvious:
- Ordinary give the opportunity to have a certain share in the company along with the right to receive dividends, as well as the opportunity to vote at a general meeting of shareholders. The specificity of holding an ordinary share is that the payment of dividends on it is not guaranteed.
- But preferred shares, unlike ordinary ones, give the holder a pre-emptive right to receive dividends, but one cannot vote at a meeting. In the event that the company decides to pay the income from the business, then first of all it is received by holders of preferred shares.
- In general, holders of such securities also have a voting right, but it is applicable only in individual cases. For example, when an organization has a loss and 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 is the difference between ordinary and preferred shares? When a company is at a loss for a long time and is declared bankrupt, the holder of preferred securities has the 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 ones, are similar to bonds with variable coupons. The percentage of payments on them depends directly on future profits. It is worth emphasizing that this paper will not have a par value, and also it does not have a specific maturity.
We continue to compare preferred shares, bonds and ordinary shares.
When are there no preference payments?
Buying preferred shares does not mean guaranteed dividends. Payments are canceled in the following two cases:
- The company’s lack of profit. It is logical: there is no income, dividends are not possible, as they are paid out of the profit that the organization receives in the process of its operating activities. This is the main risk of investing in preferred shares in addition to the danger of bankruptcy of the company. Any legal aspects of dividend payment are regulated by the Charter of the company, which is publicly available, for example, on the issuer's website.
- There are problems with the payment of dividends, even if the organization has a profit. It is legally established that an 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, privileged carriers will not be able to receive them, which may be wrong. Theoretically, a waiver of payment can occur for several years. The main objective (if a person wants to receive dividends stably) is to invest in those institutions that have paid them stably historically and, in principle, have a strategy aimed at paying dividends.
To understand the difference between preferred and ordinary shares, you need to find out what types of these financial instruments exist.
Kinds
So, shares are divided into two types: ordinary and preferred. The former allow individuals to vote at a meeting, while privileged individuals provide fixed dividends. Many are interested in what types of ordinary and preferred shares are.
Varieties of preferred shares
The following types of securities are also available:
- Non-cumulative. According to them, in case of non-payment of dividends for the current year, they are not accumulated and holders of these shares cannot expect to receive dividends in subsequent years.
- Non-convertible view. They cannot be exchanged for simple ones.
- With a share of participation. Shares give holders the right to receive additional dividends, in addition to those already provided.
Varieties of ordinary shares
Ordinary shares are distinguished depending on such signs:
- By the method of voting.
- By the nature of dividend payment.
Depending on the voting system, the following varieties of ordinary shares are distinguished:
- Ordinary subordinates give fewer votes than papers that are the same at face value.
- Polyphonic. They provide more votes than stocks of the same value.
Depending on the nature of dividend payments, the following types of ordinary securities may exist:
- Standard shares that have non-fixed dividends.
- Papers on which regular fixed funds are paid based on the results of the company’s work for the year.
- Ordinary with deferred payments (money paid after a certain date or upon reaching a specific amount of profit of the company).
Comparative characteristics
As part of identifying the difference between ordinary and preferred shares, it is worth pointing out the following aspects:
- In the event that dividends are not paid, then preferred shares may give a voting right.
- When it is required to amend the charter or if it comes to reorganization or liquidation of an organization, holders of all types of shares can make a choice.
- In the event that there are a lot of ordinary securities, the investor receives bonus rights.
- When a stable income is required, a privileged type is more profitable than an ordinary one, but only when they are purchased for several years.
The price of ordinary shares is mainly formed on the basis of exchange principles. Privileged value is usually taken at the local management decision level. In general, securities of the first type may prove to be a more profitable investment if the capitalization of the company in the stock markets grows.
They are usually considered as a reliable investment. An important nuance is that, according to the legislation of the Russian Federation, an institution is not entitled to place preferred securities when their nominal value is less than that established for the ordinary type.
The total share of preferred securities in the authorized capital of organizations of our country should in no case exceed twenty-five percent. For the ordinary type, such restrictions are not established by law.
Which shares to buy - ordinary or preferred?
What stocks are worth buying?
If a person does not plan to influence the organization, and a stable dividend yield is required, then preferred shares should be chosen. The fact is that their payment is more stable and predictable. And directly the paper itself is somewhat cheaper than ordinary shares. In addition, their market price may rise more. Provided that they are purchased for several years, they are perhaps the best option. What else is the comparative characteristic of ordinary and preferred shares?
Preferred Stock Advantage
Such securities have a number of advantages for investors if they are compared with ordinary ones:
- First of all, the owner of preferred shares is almost always guaranteed a certain return. According to them, a fixed profit is accrued, unlike the ordinary ones, the dividends of which directly depend on the income of the joint-stock company. True, they do not pay money when the company incurs losses during the reporting period.
- Secondly, financial resources for the payment of dividends 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 the joint-stock company upon its liquidation before it is divided between other owners.
- Shareholders will be able to obtain additional rights specified in the charter documents of the institution. For example, they have the right to convert their preferred securities into ordinary ones on certain conditions.
Disadvantages of preferred securities
There are also some disadvantages to owning preferred shares. So, the issuer can demand the paper from the shareholder back without giving a reason, while fully compensating for the damage with interest. Very often the preferred type of shares does not give voting rights. That is, its owner is deprived of the right to choose and, thus, deprived of the opportunity to participate in the process of managing a joint-stock company and cannot make important decisions for the company.
Another disadvantage is the fixed size of dividends. Often their value is indicated in the framework of the issue of securities of this type and does not depend on the size of the company’s profit, which, in the case of growth in business profitability, may entail a proportional decrease in the proceeds of these financial instruments.
Conclusion
Thus, some companies issue two types of shares 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 stock meeting, and there is no guarantee of the payment of dividends, and in the second it is exactly the opposite. It is better to find out the difference between ordinary and preferred shares in advance.