What is the difference between ORDINARY SHARES and PREFERENCE SHARES?

Ordinary shares

Ordinary shares are shares that represent a normal equity ownership in a company. Ordinary shares also provide shareholders to receive dividends but this is at the discretion of the company.

Preference shares

Preference shares are shares that give preferential treatment over ordinary shares, as dividends are paid out to preference shareholders before dividends are paid to ordinary shareholders.

Cumulative / non-cumulative has no bearing on whether the dividend should be classified as a Liability or Equity:

  • Cumulative dividends: must pay out arrear preferential dividends before paying ordinary dividends
  • Non-cumulative dividends: if unpaid in a year, then it need not to be paid (shareholder’s right to preferential dividend expires)

Participating / non-participating: participating shares get an extra variable dividend based on profits:

  • Participating shares: must pay a fixed dividend (coupon), which could be discretionary/mandatory, and an extra variable dividend (e.g. % of the ordinary dividend), which is generally discretionary.