Stock Market

What is the difference between preferred shares and ordinary shares?

Ordinary shares– Normally companies only have one type of shares, ordinary shares. This type of shares are the usual ones available to a company. But there are some companies where they have other types of shares, the preferred shares.

The preferred shares are established by each company with different characteristics that it has decided at the time of issuing this type of shares. I mean, these characteristics vary depending on what the company decides. Before acquiring this type of asset. The specific characteristics of the preferred shares must be specifically known .

Political rights of preferred shares

ordinary shares

Normally, in the preferred shares the shareholder does not have any kind of political right. This means that they can not vote in the Shareholders’ Meetings. This maybe for a person who is a person who is a small investor is not important. But many investors prefer to have the ability to influence decisions of the company. As for example in the fact that the company launched a takeover bid or has fights for control of a company among investors. These political rights have much meaning and make the actions that have these political rights are worth more than those that do not have those rights .

Priority in the collection of dividends from preferred shares

One of the main advantages of preferred shares is that they usually have priority for the collection of dividends on ordinary shares. In the event that everything goes well for the company. Both types of shares will collect their dividends. But if things do not go so well since the company can not pay the full dividend, the preferred shares may pay their dividends. And the ordinary ones may be smaller or perhaps not at all. The dividend of the preferred shares may depend on several factors, including (there may be more factors) for example:

  • The amount invested .
  • The evolution of the results of the company
  • Of the dividend of ordinary shares

In case of bankruptcy, what would happen with the preferred shares?

Another advantage of the preferred shares is that in the event of the bankruptcy of the company. The preferred shares have preference over the ordinary shares.

Liquidity of preferred shares

preferred shares and ordinary shares

Preferred shares are less liquid than ordinary shares , this is mainly due to three reasons:

  • There are fewer preferred shares outstanding compared to ordinary shares
  • The shareholders are usually institutional investors
  • The owners of preferred shares tend to be long-term investors

Preferred shares are redeemable

In many cases, the preferred shares are redeemable by decision of the company. Which are redeemable means for the investor that the company can buy the preferred shares when they want, at the same price at which they were sold.

Choice between ordinary shares or preferred shares

best ordinary shares

Normally investors who have to choose between a company that has ordinary shares or preferred shares will find the ordinary ones more attractive. For the political rights and they are not redeemable. Although the preferred ones have different characteristics. There may be cases in which the preferred ones are more interesting than the ordinary ones. Of course, always study in this type of contract all the legal implications involved in acquiring them.

What rights do shareholders or participants of a capital company have?

Capital companies, anonymous and limited, are the most common and widespread legal form to support a business activity. Beyond single-member societies, it is clear that the relationship between partners is key. Now , what rights do shareholders or participants of a company have?

They are regulated in article 93 and SS of the Capital Companies Law.

In the terms established in this law, and except for the cases envisaged in it, the member will have, at least, the following rights:

  1. a) The one of participating in the distribution of the social gains and in the patrimony resulting from the liquidation.
  2. b) The preferential assumption in the creation of new shares or the preferential subscription in the issuance of new shares or bonds convertible into shares.
  3. c) To attend and vote at general meetings and to challenge social agreements.
  4. d) The information one.

We can divide these rights into two large groups, those with political content or linked to the management of society. And the economic ones, those that allow participation of profits mainly through dividends.

On the other hand, these rights are not absolute , and can be modulated by the statutes. The specific type of action or participation held, etc.

Social participation and actions can grant different rights. Actions that have the same content of rights constitute the same class. When several series are constituted within a class, all those that integrate a series must have the same nominal value.

For the creation of social participation and the issuance of shares that confer some privilege over ordinary ones. The corresponding formalities must be observed in their specific case.

Political rights

Political rights are those that guarantee participation in the management of society. We can mention, among others, the following:

Right of attendance, voice and vote in the General Meetings : this right can be set at a minimum. Or directly exclude some type of actions from it in exchange for a privileged economic regime. The so-called non-voting shares.  But qualified majorities may be necessary or privilege, according to the legislation, certain type of actions.

Right of information : it is the logical presupposition of the previous one, since to be able to exercise it it is necessary to be aware of the progress of society. The shareholder’s access to the annual accounts, the management report and, in general. Any document that will be approved at the Meeting must be provided. Of course. This includes requesting clarifications from the Board itself, although this is a point where frictions. And discussions about access to speaking times and the answers given are common.

Right to challenge social agreements : shareholders and participants can legally challenge those resolutions of the Boards that violate the Law, the bylaws. Or that prejudice the corporate interest. Through it protects itself and society.

Right to social action of responsibility : beyond the scope of the decisions adopted in the Boards, to control the day to day of the management. The partners can exercise the social action of responsibility, when they consider that the managers are damaging the interests of the society.

Right to convene a meeting : the members representing 5% of the company may request the directors to call a meeting. And if not attended, bring it before the courts.

An account aimed at both freelancers and SMEs that need an account for their professional activity : more information

Economic rights

discover ordinary shares

The economic rights allow the shareholder or participant to participate in the distribution of the social gains, if any. Among the economic rights are, among others, the following:

Right to the dividend : the shareholder or participant is entitled to the benefits distributed by the company among its partners. The dividend, depending on (with nuances) the capital contributed. It should be clear that the distribution. Or not of benefits is a decision of the General Board. Without benefits there is no dividend.

Preferential subscription right: this is the preferential right of the current partners to resort to capital increases or to the issuance of convertible bonds.

Right of transfer of shares or participation: consists of the right of the partners to dispose of the shares or participation. This right can be substantially limited statutorily or legally, being very frequent in limited companies. And in many corporations to avoid the entry of undesired partners.

Right to the liquidation fee: If the company is dissolved, the shareholder is entitled to his proportional share in the liquidation.

Right of separation: in certain cases substitution of the corporate purpose, transfer of domicile abroad, transformation into limited. Or collective partnership and, attention, absence of profit sharing for more than 5 years in unlisted companies.

Richard Brown

I'm Richard, the writer of the blog. I enjoy writing about the lifestyle and all things related to technology. I've been blogging for over six years and I've also been working as a technology journalist for over three years. In my spare time, you can usually find me reading, playing video games, or experimenting with new technologies.

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