COMPANIES: TYPES OF SHARES

0rdinary and preference shares.

In order to appeal to as many investors as possible, a company may issue more than one kind of shares; just as an automobile manufacturer may make various sedans and station wagons in order to appeal to various groups of car buyers. When only one type of share is issued, it is called an ordinary share. Ordinary shares have basic rights previously mentioned. Whenever these rights are modified, so that certain shareholders are given preferential rights, the term “preference share” is used to describe this second type of share. A few companies issue two or three classes of preference shares, each class having certain distinctive features designed to interest a particular type of investor. In summary, we may say that even if the company of the type discussed here has ordinary share capital, many companies also issue preference shares, and a few companies issue two or more types of preference shares.

An ordinary share may be regarded as the basic, residual element of ownership. It carries voting rights and, therefore, is the means of exercising control over the business. Ordinary shares have unlimited possibilities of increasing value; during the last decade the market prices of ordinary shares of many leading companies rose to three or four times their former values. They have also fallen spectacularly in the last decade as a result of economic conditions. The rise or fall in an individual company’s shares may of course be due not only to general economic conditions but also to the market’s anticipation of its future performance. Ordinary shares lose value more rapidly than other types of securities when companies encounter periods of unprofitable business.

The holders of preference shares are granted special rights and privileges, as set out in the memorandum or articles. Quite commonly, the distinctive features of such shares are:

1. Preference to dividend at a certain rate, in priority to the holders of other classes of shares. Preference shares are ”Prima facie” preferential as to dividend.

2. Priority to return of capital in the event of the winding up of the company in priority to holders of other classes of shares.

3. No voting rights.

The shareholders’ equity section, given below, illustrates the balance sheet presentation for a company having both preference shares and ordinary shares.

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