Distinguish between the Ordinary Shares and Preference Shares.

Ordinary Shares and Preference Shares

Definition and Characteristics

1. Ordinary Shares: Ordinary shares, also known as common shares, represent ownership in a company and entitle shareholders to vote on corporate matters, such as electing the board of directors and approving major corporate policies. Ordinary shareholders benefit from the company's success through dividends and capital appreciation but are last in line to receive assets in the event of liquidation.
2. Preference Shares: Preference shares, or preferred shares, are a type of equity security that provides shareholders with preferential treatment regarding dividends and asset distribution upon liquidation. Preference shareholders typically do not have voting rights but receive fixed dividends before any dividends are paid to ordinary shareholders.

Dividend Payments

1. Ordinary Shares: Dividends for ordinary shares are variable and are declared at the discretion of the company’s board of directors. The amount of dividends can fluctuate based on the company’s profitability and financial situation. If the company faces financial difficulties, dividends on ordinary shares may be reduced or suspended.
2. Preference Shares: Preference shares usually pay a fixed dividend rate, which is predetermined and paid out before any dividends are distributed to ordinary shareholders. This fixed nature of dividends makes preference shares more stable for income-seeking investors, providing a predictable return.

Voting Rights

1. Ordinary Shares: Ordinary shareholders typically possess voting rights, allowing them to participate in key corporate decisions. Each ordinary share usually grants one vote, giving shareholders a direct influence on company governance.
2. Preference Shares: Preference shareholders generally do not have voting rights. This lack of influence means that preference shareholders are primarily concerned with their dividend payments and the potential for capital appreciation.

Risk and Return

1. Ordinary Shares: Ordinary shares carry a higher risk compared to preference shares because their dividends are not guaranteed and depend on the company’s performance. However, the potential for higher returns exists, as ordinary shareholders benefit from capital gains if the company grows in value.
2. Preference Shares: Preference shares are considered less risky since they provide fixed dividends and have priority over ordinary shares in asset distribution during liquidation. However, this comes at the cost of potentially lower returns, as preference shareholders miss out on the capital appreciation that ordinary shareholders may enjoy during prosperous periods.

Liquidation Preference

1. Ordinary Shares: In the event of liquidation, ordinary shareholders are last in line to receive any remaining assets after all liabilities, debts, and preference shares have been settled. This means that in the event of financial distress, ordinary shareholders may receive little or nothing.
2. Preference Shares: Preference shareholders have a higher claim on assets compared to ordinary shareholders. In a liquidation scenario, they are entitled to receive their investment amount back (along with any accrued dividends) before any distribution is made to ordinary shareholders.

Conclusion

In conclusion, ordinary shares and preference shares represent two distinct types of equity investments, each with its own characteristics, rights, and risk profiles. Ordinary shares offer voting rights and the potential for higher returns but come with higher risk, especially in times of financial instability. Preference shares provide fixed dividends and a more secure position in the event of liquidation but typically lack voting rights. Understanding these differences is essential for investors when making decisions about their investment strategies and risk tolerance.

Subscribe on YouTube - NotesWorld

For PDF copy of Solved Assignment

Any University Assignment Solution

WhatsApp - 9113311883 (Paid)