We can distinguish three types of shares,
- Preference shares
- Deferred shares
- Ordinary shares
Preference shares are shares which confer certain preferential rights on their holders.
The rights attaching to preference shares are set out in the company’s contribution. They may vary from company to company, but typically:
- Preference shareholders have a priority right over ordinary shareholders to a return of their capital if the company goes into liquidation.
- Preference shares do not carry a right to vote.
- If the preference shares are cumulative, it means that before a company can pay an ordinary dividend it must not only pay the current year’s preference dividend, but must also make good any arrears of preference dividends unpaid in previous years.
Deferred shares are equity shares that will receive a dividend only after other classes of shares including ordinary shares have received a specified rate of dividend, or will receive a dividend only after a specified time from issue.
Ordinary shares are shares which are not preferential with regard to dividend payments. Thus a holder only receives a dividend after fixed dividends have been paid to preference shareholders.
Ordinary shares normally carry voting rights; they are effective owners of a company. They own the “equity” of the business, and any reserves of the business belong to them.