Distinguish between Ordinary Shares and Preference Shares.

Ordinary shares and preference shares represent different types of equity ownership in a company, each with distinct characteristics and rights.

Ordinary Shares:

1. Ownership and Voting Rights:

   • Ordinary shares, also known as common shares, represent ownership in a company. Shareholders holding ordinary shares have voting rights in company decisions, allowing them to participate in the governance and decision-making processes.

2. Dividend Payment:

   • Dividends on ordinary shares are distributed to shareholders after any obligations to preference shareholders are met. The payment of dividends to ordinary shareholders is discretionary and depends on the company's profitability and management decisions.

3. Risk and Returns:

   • Ordinary shareholders bear more risk compared to preference shareholders. In the event of liquidation or bankruptcy, ordinary shareholders have a residual claim on the company's assets after all debts and obligations, including those to preference shareholders, have been satisfied.

4. Capital Appreciation:

   • Ordinary shareholders benefit from capital appreciation as the value of their shares may increase over time with the company's performance and growth. However, they also face the risk of capital loss if the company's value decreases.

5. Residual Claim:

   • Ordinary shareholders have a residual claim on the company's profits and assets. After meeting all liabilities and paying preference shareholders, any remaining profits belong to ordinary shareholders.

Preference Shares:

1. Fixed Dividends:

   • Preference shares come with a fixed dividend rate, and shareholders holding preference shares receive dividends before ordinary shareholders. The fixed dividend provides a stable income stream to preference shareholders.

2. No Voting Rights:

   • Typically, preference shareholders do not have voting rights in company decisions. They are not actively involved in the governance or decision-making processes. Voting rights are usually retained by ordinary shareholders.

3. Preference in Liquidation:

   • In the event of liquidation or bankruptcy, preference shareholders have a priority claim on the company's assets over ordinary shareholders. They are entitled to receive their investment back before any residual amount is distributed to ordinary shareholders.

4. Less Capital Appreciation:

   • Preference shareholders generally experience less capital appreciation compared to ordinary shareholders. Their returns are primarily derived from fixed dividends rather than the potential for capital gains.

5. Lower Risk:

   • Preference shareholders bear lower risk than ordinary shareholders because they receive fixed dividends and have priority in the distribution of assets in case of liquidation. However, this comes at the trade-off of limited participation in the company's growth.

In summary, ordinary shares represent ownership with voting rights, variable dividends, and a higher risk-return profile. Preference shares, on the other hand, offer fixed dividends, priority in liquidation, and a more conservative risk-return profile with limited voting rights. Investors choose between ordinary and preference shares based on their investment goals, risk tolerance, and desired level of involvement in company decisions.