Difference between ordinary and preferred shares

The differences between ordinary and preferred shares are related to the rights and privileges that an investor has when he is a shareholder in a company.

The most important differences are the following:

  1. The preferred share is a share that gives its holder an extra privilege, generally of an economic nature, with respect to what we commonly know as ordinary shares. For example, the holder of preferred stock has a higher hierarchy in the collection of dividends or in the distribution of the remaining equity in the event of bankruptcy by the company. Preferred shares do not entitle their holder to vote at ordinary or extraordinary shareholders’ meetings, nor do they assign any participation in the capital of the company.
  2. If there are assets in liquidation, the hierarchy in the collection is better for the preferred shareholder than for the ordinary shareholder. In addition, the preferred shareholder may have other privileges such as access to new shares at a discounted price with respect to the market price or the nominal price, remuneration in kind, higher dividend yield of its shares, exchange of shares or other rights derived from the holding preferred shares.
  3. The liability of the ordinary shareholder is always limited, however, that of the preferred shareholder may not always be so under certain conditions. Generally, the preferred shareholder is more linked to the company’s policy and long-term performance, while the ordinary shareholder seeks to obtain profitability in the short or medium-term and tries to speculate with the value of the share, therefore, in many In some cases, they are not shareholders who identify with the company’s policy since what they are looking for is to speculate on the future valuation of the company, they enter and exit it according to market conditions or there is news regarding the value, such as takeover bids, IPOs, capital increases, splits.

Ordinary and preferred shares have always existed and are a way of giving value and importance to the company, since these differences allow the creation of financial models adapted to different investment profiles of its shareholders, rewarding those who believe in the future value of the company. company and its policy or business model.