Preference and ordinary, or common, shares are the two primary types of stock that companies offer to investors. This should not be confused with classes of stock, which are separate valuations that divide stock by how many benefits it gives if there are different levels. Preference and common ratings control what benefits the shares give in the first place, and what those benefits mean to both the business and the investor.
Common shares of stock are those most often issued by companies and traded on the stock market. They are sold at a specific price, and this price can go up and down based on how much investors are willing to pay for it at stock auctions. If a company is successful and grows, then its stock will have greater demand and the value of the common shares will increase. Some companies also choose to offer dividends, or payments, to shareholders based on the earnings the company has made during a recent term.
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Preference shares of stock are more like a combination between a debt and equity instrument. They are sold like common shares, but come with a highly structured payment plan based on dividends. Investors can consult this payment plan to find out exactly how much the company will pay them based on company earnings. Unlike common shares, preference shares always guarantee a dividend. Companies usually only issue a small number of preferred stock compared to the number of common shares.
One primary difference between preference and common shares is the investment risk associated with both. Common stock is one of the most risky investments, since it regularly changes price based on investor reactions and the success of the company -- events that cannot easily be predicted or controlled. Preference shares offer a more dependable source of income through their dividends, although they have less potential to increase in value. Preference shares are also redeemed before common shares if the company fails, but this is rarely a concern.
Voting rights are given to shareholders based on how many shares they possess. Common shares each carry a certain number of votes or a fraction of a vote, depending on how the stock is divided. Preference shares do not carry any voting rights for investors. This helps the company maintain ownership when it wants to raise capital through equity but does not want to spread voting rights over a wider pool of investors.