Accounting

Difference Between Ordinary Shares And Preference Shares

Shares are parts of a company. Shares are issued with specific rights attached. Shares are then given different names to signify differences in rights. In general there are two types of Shares. Such as- Ordinary shares and Preference shares. There are Difference Between Ordinary Shares And Preferred Shares which I am describing shortly in below section.

1. Ordinary Shares:

 Ordinary Share is the most common form of share capital other than preference shares. The ordinary shares or common shares have no specific rights to any distributions of profit by the company. Ordinary shareholders are often referred to as Residual equity-holders because these shareholders obtain what is left after all other parties’ claims have been met.

The shareholders of ordinary shares have no specific rights to dividends, being residual equity holders. Whether a dividend is paid depends on the decisions made by the directors. Regulations in some countries may specify from which equity accounts the dividends can be paid, or whether the company has to meet solvency tests before paying dividends. In some cases, the directors may be allowed to propose a dividend at year-end, but this proposal may have to be approved by the shareholders in the annual general meeting (AGM).

2. Preference Shares:

 Another form of share capital is preference shares. As the name implies, holders of preference shares generally have a preferential right to dividends over the common or ordinary shareholders. Note firstly that the name of the instrument does not necessarily indicate the rights associated with that instrument. Some preferred shares are in reality not equity but liabilities or they may be compound instruments being partially debt and partially equity, sometimes referred to as hybrid securities. Secondly, the rights of preference shareholders may be very diverse. Some preference shares have a fixed dividend; for example, a company may issue preference shares at $10 each with a 4% dividend per year, thus entitling the shareholder to a 40 cents dividend per year.

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