What are common and preference shares?
Common shares (also called ordinary shares) are the real ownership of a company. The shares most people buy on the stock market are common shares. Their owners can vote at the annual general meeting (AGM), have a say in electing directors, and get the full benefit of dividends and price rises when the company does well. But they are last in the queue to be paid.
Preference shares sit somewhere between ownership and a loan. They usually carry a set dividend rate that must be paid before common shareholders get anything. If the company closes, preference holders are paid after the lenders but before common shareholders. In return they usually have no vote, and however much profit the company makes, their dividend does not rise above that set rate.
Say three friends open a restaurant. Ruma and Jahid are the owners: they make the decisions, take a bigger share when profits are high, and are hit first when there are losses. The third friend, Tanvir, puts in money on the condition that he is paid a set 8% out of profits each year before anyone else, but he stays out of decisions about the menu or prices. Ruma and Jahid are like common shareholders; Tanvir is like a preference shareholder. The people and numbers are made up.
Why it matters to an investor
- To know what you are actually buying: what ordinary investors buy on the stock market is almost always common shares, with no promise on dividends or price.
- To know who is paid first when things go wrong: lenders come first, then preference holders, and common shareholders last. Often nothing is left by the last step.
- To see the trade-off between risk and return: more protection comes with a capped return, while unlimited upside comes with more risk. You cannot have both at once.
- To read a company’s accounts: preference dividends are paid first, so how much profit is really left for common shareholders depends on them.
Side by side
- Dividends: common shares have no set rate; it is whatever the board proposes and the AGM approves. Preference shares usually have a set rate, paid before any common dividend.
- Voting: common shares usually carry one vote per share. Preference shares usually have no vote, though in many cases they gain one if their dividends fall into arrears.
- Upside: if the company grows, common shares can rise a lot in price and dividends. Preference income usually stays fixed at its set rate.
- If the company is wound up: after lenders, preference holders are repaid, then common shareholders get whatever is left.
- Term: common shares have no end date. Many preference shares are “redeemable”, meaning the company pays the money back and cancels them after a set time.
Kinds of preference share
- Cumulative: if a year’s dividend is skipped, it builds up and must be paid in full before common shareholders receive anything.
- Non-cumulative: a skipped dividend is simply lost.
- Convertible: can be switched into common shares after a set time, giving some share in the company’s growth.
- Redeemable: paid back on a set date or at the company’s choice. In Bangladesh, under the Companies Act 1994, the money for this can come only from profits available for dividends, a fresh share issue made for the purpose, or the sale of assets.
In Bangladesh
The shares ordinary investors trade on the Dhaka and Chittagong stock exchanges are common shares. Some listed companies have issued preference shares through private placement with BSEC approval, meaning to a selected group of investors; in one such example the shares were redeemable, cumulative and ran for a few years. A company cannot issue preference shares unless its articles of association allow it.
For a company, preference shares are a way to raise money without the pressure of loan interest and without diluting the owners’ votes. For an investor they resemble a bond, but a company that misses bond interest is in default, while one that skips a preference dividend usually is not. So despite the set rate, they are less protected than a bond.
Common mistakes
- Assuming “preference” means safe or guaranteed income. If the company has no profits, the dividend can stop.
- Treating preference shares as equal to bonds. If the company closes, lenders are paid first.
- Thinking common shares “always pay a dividend”. There is no obligation to pay one.
- Investing without reading whether shares are cumulative, redeemable or convertible. Shares with the same label can have very different terms.
Common shares mean a vote and an open-ended share of gains and losses, but last in line to be paid; preference shares mean a set dividend paid first, but a capped upside and usually no vote.