Preferred ordinary shares

3 key takeaways

• Preferred ordinary shares provide the potential for dividends like preferred shares and voting rights like ordinary shares.
• They often offer a fixed dividend but can also participate in additional earnings under certain conditions.
• These shares are designed to attract investors seeking both income stability and a degree of control in the company.

What are preferred ordinary shares?

Preferred ordinary shares, also known as preference ordinary shares, are a unique class of shares that blend characteristics of both preferred shares and ordinary shares. These shares typically provide investors with a fixed dividend, similar to preferred shares, while also granting them voting rights, akin to ordinary shares. This combination offers a balanced investment option for those looking to gain both steady income and a voice in the company’s governance.

These shares are particularly attractive to investors who want to benefit from stable dividend payments and still have the opportunity to influence company decisions through voting.

Features of preferred ordinary shares

Preferred ordinary shares come with several distinctive features that set them apart from other share classes:

• Fixed dividends: Preferred ordinary shares usually offer a fixed dividend rate, providing a predictable income stream to investors.
• Voting rights: Unlike most preferred shares, preferred ordinary shares often come with voting rights, allowing shareholders to participate in corporate decisions.
• Participation in additional earnings: In some cases, these shares may also entitle holders to participate in additional profits beyond the fixed dividend, under certain conditions specified by the company.
• Priority in liquidation: Preferred ordinary shareholders generally have a higher claim on assets than ordinary shareholders in the event of liquidation, but they may rank below other types of preferred shares.

These features make preferred ordinary shares a versatile investment option that combines income security with the potential for capital growth and governance participation.

Benefits of preferred ordinary shares

Preferred ordinary shares offer several advantages for investors:

• Income stability: The fixed dividend provides a reliable source of income, which can be especially appealing in uncertain economic times.
• Governance participation: Voting rights give shareholders a say in the company’s direction, aligning their interests with those of the company’s management and ordinary shareholders.
• Enhanced security: In the event of liquidation, preferred ordinary shareholders have a higher priority for asset distribution than ordinary shareholders, providing an additional layer of security.

These benefits make preferred ordinary shares an attractive option for investors seeking a blend of income, security, and involvement in corporate governance.

Risks and considerations

While preferred ordinary shares have many benefits, there are also risks and considerations to keep in mind:

• Dividend risks: Although dividends are fixed, they are not guaranteed. Companies can suspend dividend payments if they face financial difficulties.
• Market volatility: The value of preferred ordinary shares can fluctuate with market conditions, impacting the potential for capital gains.
• Complexity: The hybrid nature of these shares can make them more complex to understand compared to standard preferred or ordinary shares, requiring thorough due diligence.

Investors should weigh these risks against the potential benefits to determine if preferred ordinary shares align with their investment goals and risk tolerance.

Preferred ordinary shares provide a unique investment opportunity that balances income, security, and corporate governance involvement. By understanding their features, benefits, and risks, investors can make informed decisions about including these shares in their investment portfolios.