When investing in stocks or raising capital for your business, understanding the fundamental differences between ordinary shares and preferred shares is crucial for making informed financial decisions. Whether you’re a first-time investor or an experienced business owner, knowing which type of shares to buy or issue can significantly impact your returns and control over company decisions.
What Are Ordinary Shares (Common Shares)?
Ordinary shares, also known as common shares or common stock, represent ownership in a company and constitute a claim on part of the company’s assets and earnings. When most people talk about buying “stocks,” they’re typically referring to ordinary shares.
Key characteristics of ordinary shares include:
- Voting rights: Shareholders can vote on company matters and board elections
- Dividend eligibility: Right to receive dividends when declared by the board
- Capital appreciation potential: Share price can increase over time
- Residual claim: Last to receive assets if company liquidates
What Are Preferred Shares?
Preferred shares are a hybrid security that combines features of both stocks and bonds. They represent ownership in a company but typically don’t come with voting rights. Instead, preferred shareholders enjoy certain privileges over ordinary shareholders, particularly regarding dividend payments and asset distribution.
Key characteristics of preferred shares include:
- Fixed dividend payments: Usually receive predetermined dividend amounts
- Priority in liquidation: Get paid before ordinary shareholders if company dissolves
- Limited or no voting rights: Typically cannot vote on company decisions
- Convertible options: Some can be converted to ordinary shares
- Callable features: The Company may have the right to repurchase shares
Key Differences Between Ordinary Shares and Preferred Shares
Voting Rights
Ordinary Shares: Full voting rights on corporate matters, including board elections and major business decisions. In Thailand, one ordinary share equals one vote. Preferred Shares: Under Thai law, all shareholders including preferred shareholders must have voting rights, though preference shares may have different voting arrangements than ordinary shares.
Dividend Payments
Ordinary Shares: Dividends are variable and paid only after preferred shareholders receive theirs. No guarantee of dividend payments. Preferred Shares: Fixed dividend rate with priority over ordinary shareholders. Must be paid before any dividends go to common shareholders.
Capital Appreciation
Ordinary Shares: Unlimited upside potential as company value grows. Share price can increase significantly during bull markets. Preferred Shares: Limited capital appreciation potential since they often trade more like bonds, focusing on dividend yield rather than price growth.
Risk and Return Profile
Ordinary Shares: Higher risk but higher potential returns. More volatile price movements. Preferred Shares: Lower risk than ordinary shares but also lower potential returns. More stable, income-focused investment.
Liquidation Priority
Ordinary Shares: Last in line to receive assets if company liquidates, after all debts and preferred shareholders are paid. Preferred Shares: Higher claim on company assets during liquidation, paid before ordinary shareholders but after bondholders.
When to Choose Ordinary Shares vs Preferred Shares
Choose Ordinary Shares When:
- You want maximum growth potential
- You’re comfortable with higher risk and volatility
- You want voting rights and company influence
- You’re investing for long-term capital appreciation
- You believe in the company’s future growth prospects
Choose Preferred Shares When:
- You prioritize steady income over growth
- You want lower volatility in your portfolio
- You’re nearing retirement or need regular income
- You want some stock exposure with bond-like characteristics
- You’re concerned about downside protection
Tax Implications
The tax treatment of ordinary and preferred shares can differ significantly:
- Ordinary Shares: Capital gains are taxed when shares are sold, potentially at favorable long-term capital gains rates. Qualified dividends may receive preferential tax treatment.
- Preferred Shares: Dividend income is typically taxed as ordinary income, though some preferred dividends may qualify for preferential rates. Always consult a tax professional for your specific situation.
Frequently Asked Questions
- Can preferred shares be converted to ordinary shares?
A: Many preferred shares include conversion features that allow holders to convert to ordinary shares under specific conditions, typically when the ordinary share price exceeds a certain threshold.
Do preferred shareholders get to vote?
A: In Thailand, unlike many Western markets, all shareholders including preferred shareholders must have voting rights according to Thai company law. However, preferred shares may have different voting arrangements or weightings compared to ordinary shares.
Which type of share is better for beginners?
- A: Ordinary shares are often better for beginners who want to learn about stock investing and benefit from long-term market growth, though preferred shares can be suitable for those prioritizing income
How do dividends work for each type?
- A: Preferred shareholders typically receive fixed dividends that must be paid before any dividends go to ordinary shareholders. Ordinary share dividends vary based on company performance and board decisions.
- What happens to preferred shares during a company buyout?
- A: This depends on the specific terms of the preferred shares, but they often have liquidation preferences that ensure preferred shareholders are paid before ordinary shareholders during acquisition scenarios.
Understanding the differences between ordinary shares and preferred shares is essential for building a well-balanced investment portfolio. Ordinary shares offer unlimited growth potential with voting rights but come with higher risk and volatility. Preferred shares provide steady income and downside protection but have limited upside potential and typically no voting rights.
The choice between these share types should align with your investment goals, risk tolerance, and income needs. Many successful investors include both types in their portfolios to balance growth potential with income stability. Consider consulting with a financial advisor to determine the right mix for your specific situation and investment objectives.
