Preference Shares vs Ordinary Shares: What’s the Difference?

When companies raise capital, they often issue different classes of shares. Understanding the difference between ordinary and preference shares is essential before making investment decisions. While both represent ownership in a company, they differ in rights, income, and growth potential. This guide explains preference shares vs ordinary shares and helps investors decide which may suit their objectives.

What Are Ordinary Shares?

Ordinary shares, also called common shares, are the most widely issued type of equity. They represent a claim on a company’s profits and assets, giving investors both risks and rewards tied directly to business performance. By holding ordinary shares, investors become partial owners of the company, with their returns coming from capital appreciation and dividends when profits are distributed.

Key features include:

• Voting rights: Ordinary shareholders can vote on major company decisions, including electing directors.
• Dividends: Payments are not guaranteed. Companies distribute dividends from profits, and they may vary or stop entirely.
• Capital growth potential: Ordinary shares can increase significantly in value if the company performs well.

Example:

Apple Inc. illustrates this clearly. Its ordinary shares traded at about $25 in 2010 and rose above $200 by 2025, an increase of roughly 700% over 15 years. Since 2012, Apple has also paid regular dividends, rewarding investors with both income and long-term growth.

What Are Preference Shares?

Preference shares, also known as preferred stock, are a class of equity that blends features of both shares and bonds. They typically provide investors with a fixed dividend and priority over ordinary shareholders in the distribution of profits and assets. However, they usually come without voting rights, which limits shareholder influence. They are less common but remain popular in sectors like banking and utilities.

Key features include:

• Fixed dividends: Preference shareholders typically receive a fixed dividend, paid before ordinary shareholders.
• Priority: In the event of liquidation, preference shareholders have a higher claim on assets than ordinary shareholders.
• Limited or no voting rights: Most preference shares do not carry voting rights.
• Types of preference shares: Cumulative, convertible, redeemable, and participating.

Example:

JPMorgan Chase issues several series of preference shares, with dividends typically ranging from 4.5% to 6% annually. These consistent payouts appeal to income-focused investors who value stability over growth potential.

Preference Shares vs Ordinary Shares: Key Differences

Investors often ask: what is the difference between ordinary and preference shares? The answer lies in how each type of share provides rights, rewards, and risks. Ordinary shares tend to suit investors looking for long-term capital appreciation and voting power, while preference shares are designed to deliver stable income with more security.

To make this clear, the table below shows the main eight differences between ordinary and preference shares:

1. Ownership rights

Ordinary shareholders hold voting rights that allow them to influence company decisions such as electing directors or approving mergers. Preference shareholders usually lack voting rights, which makes them less influential in governance. For example, Apple’s ordinary shareholders can vote at annual meetings while JPMorgan preference shareholders cannot.

2. Dividend payments

Ordinary share dividends depend on profits and may vary from year to year. Preference shares usually provide fixed dividends, offering a more predictable income stream. For instance, JPMorgan’s preference shareholders receive around 6 percent annually regardless of fluctuations in ordinary dividends.

3. Dividend priority

Ordinary shareholders receive dividends only after preference shareholders have been paid. This makes preference shares safer for income-focused investors. In 2008, several banks halted ordinary share dividends but continued paying preference shareholders.

4. Capital growth

Ordinary shares offer higher potential for price appreciation over time. Preference shares provide limited upside because they focus on steady income. Apple’s share price rising from $25 in 2010 to over $200 in 2025 highlights the strong growth potential of ordinary shares.

5. Risk level

Ordinary shares are more volatile since their value follows market conditions and company performance. Preference shares are less risky because of their stable payouts. This is why retirees often prefer preference shares while younger investors lean toward ordinary shares.

6. Priority in liquidation

In the event of bankruptcy, preference shareholders have a stronger claim on assets than ordinary shareholders. This added protection reduces their downside risk. For example, preference shareholders may recover part of their investment in liquidation while ordinary shareholders often lose everything.

7. Convertibility

Ordinary shares cannot be converted into other types of equity. Certain preference shares, called convertible preference shares, can be exchanged for ordinary shares at a future date. Startups sometimes issue convertible preference shares to attract venture capital investors.

8. Investor profile

Ordinary shares appeal to investors seeking growth and long-term wealth. Preference shares suit investors looking for steady income and reduced risk. A 30-year-old saving for retirement may choose ordinary shares while a retiree might prefer preference shares for reliable dividends.

Preference Shares vs Ordinary Shares: Which Should You Choose?

The choice between preference shares and ordinary shares depends on your investment objectives. Some investors prioritise growth, while others value stability and income. Here’s how different types of investors typically approach each option:

People invest in ordinary shares when:

• They want long-term growth through rising share prices.
• They can accept higher risk and short-term volatility.
• They value voting rights and influence in company decisions.

Example:

A 30-year-old professional with a long investment horizon chooses Apple ordinary shares. He accepts short-term volatility in exchange for long-term wealth accumulation, believing the growth potential outweighs dividend uncertainty.

People invest in preference shares when:

• They prioritise steady income through fixed dividends.
• They want lower risk and more security in returns.
• They do not mind limited or no voting rights.

Example:

A 65-year-old retiree invests in JPMorgan preference shares, such as its PSL series, which pays around 6 percent annually. She values predictable income to cover living expenses and prefers the lower risk profile, even though it means limited upside potential.

Summary

Ordinary shares offer voting rights and the potential for long-term capital growth, making them attractive to younger or growth-focused investors willing to accept higher risk. Preference shares provide fixed dividends and greater security, appealing to retirees or income-seeking investors who prioritise stability over rapid gains. By understanding the difference between ordinary shares and preference shares, investors can choose the option that best fits their goals and risk appetite.

Learn More About the Share Market with VT Markets

At VT Markets, you can trade both ordinary shares and preference shares through Contracts for Difference (CFDs). This lets you benefit from price movements in both rising and falling markets without directly owning the shares. With access to leading platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5), along with competitive spreads and professional support, VT Markets offers a flexible way to explore global share opportunities. New traders can start with a VT Markets demo account to practise strategies in real time, while further guidance and resources are available through the VT Markets Help Centre.

Start trading with VT Markets today and take your first step into the global share market.

Frequently Asked Questions (FAQs)

1. What is the difference between ordinary and preference shares?

Ordinary shares give investors ownership rights, voting power, and the potential for long-term capital growth, but dividends are not guaranteed and risks are higher. Preference shares provide fixed dividends and priority in payouts, with less risk and more stability, but usually without voting rights or significant growth potential.

2. Which is better, preference shares or ordinary shares?

Neither is universally better, as it depends on your goals. Ordinary shares suit investors who want long-term capital growth and are comfortable with higher risk. Preference shares are better for investors seeking steady dividends and lower volatility. The right choice comes down to your investment horizon and risk appetite.

3. Do preference shares pay higher dividends than ordinary shares?

Yes, preference shares generally pay higher and more stable dividends than ordinary shares, which depend on company profits.

4. Which is safer: preference shares or ordinary shares?

Preference shares are safer in terms of income and liquidation priority, while ordinary shares carry higher risk but greater potential for long-term gains.

5. Are preference shares more common in certain industries?

Yes. They are frequently issued by banks, insurance companies, and utilities because these industries benefit from stable capital and consistent payouts.

6. Do both types of shares trade on stock exchanges?

Ordinary shares are almost always listed, while preference shares may have limited availability and liquidity, depending on the market.

7. Can I hold both preference and ordinary shares in one portfolio?

Yes. Many investors combine both to balance income stability from preference shares with growth potential from ordinary shares.