Ordinary and Preference Shares

(1. Both the ordinary and preference shareholders are paid dividend from the net profits or retained earnings but preference shareholders are paid in preference before the ordinary shareholders?) If there is sufficient distributable profits / reserves to pay only one of the dividends (equity or preference) then the preference dividend would be paid and nothing for the equity shareholders.

(2. For eg if a company has a net profits of $1m and decided to give 20% dividend to all the shareholders then it means both the ordinary and preference shareholders will get the $200k in total?) Not really. Preference shares are normally issued as, for example, 3% cumulative preference shares of £1 each. This is telling us that each year (if there are profits / reserves available, the preference shareholders will receive a dividend of 3 pence on each of their shares. If there is LOADS of profit available, the preference shareholders will receive a dividend of 3 pence on each of their shares! And if there aren’t enough profits to pay even the preference dividend this year, the dividend will roll over so that this year’s dividend will be paid next year as well as next year’s dividend

Dividends on equity shares are talked of not in terms of percentages but in terms of pence / cents per share

(3. What are the difference between ordinary shareholders and preference shareholders and what are the benefits and disbenefits?)

WOOO – that’s a BIG question!

Risk – greater for equity shares
Market trading – easier for equity
Share movement potential – much greater for equity
Voting – yes for equity, no for prefs
Certainty of dividend – no for equity, yes for prefs
Priority in liquidation – no for equity, yes for prefs
Exciting – yes for equity, boring prefs

But all these situations where preference shares have the edge over equity shares, when you compare them with debentures, those advantages disappear (certainty of interest, security for debs, greater priority in liquidation)

OK?