Types of Shares: Ordinary, Preference and Deferred

Walk into any conversation about shares and you will usually hear about buying shares in a company as if all shares are the same thing. They are not. The word “share” covers several different instruments, each with different rights attached. Knowing the difference matters, particularly once you start looking at income-generating investments or more complex situations like company takeovers.

Most of the shares you will come across as a private investor are ordinary shares. These are the standard units of ownership in a company and the ones listed on the stock exchange that you can buy and sell through a share dealing account or ISA. When you own ordinary shares, you own a slice of the company. You are entitled to receive dividends if the board declares them, you get to vote at the annual general meeting (one share, one vote in most cases), and you benefit if the share price rises over time.

The “ordinary” in ordinary shares refers to the fact that these shareholders sit in the middle of the priority queue. They are not first in line for anything. If the company does well, they do well. If the company goes bust, they are near the back of the queue for any remaining assets, after the tax authorities, creditors, bondholders and preference shareholders have all been paid.

That last point brings us to preference shares. These are a different class of share, typically issued by larger companies and often not the kind of thing that turns up in a basic share dealing account. Preference shares pay a fixed dividend, usually expressed as a percentage of the nominal (face) value of the share. If a company has 6% preference shares with a nominal value of one pound, the holder receives six pence per share per year, regardless of how profitable the company is or whether the directors decide to raise the ordinary dividend.

The “preference” part refers to their position in the queue. In the event of a dividend being paid, preference shareholders are paid first before ordinary shareholders receive anything. In the event of liquidation, they rank ahead of ordinary shareholders for any money left over, though they still sit behind secured creditors and bondholders. This makes preference shares more predictable than ordinary shares. The income is fixed and the rights in a wind-up are clearer.

However, that predictability comes at a cost. Preference shareholders typically have no voting rights unless the company falls behind on their dividends. They also do not benefit from growing profits in the same way ordinary shareholders do. If the company has a bumper year and doubles its ordinary dividend, preference shareholders still receive their fixed rate. They get consistency, but they give up the upside.

Within preference shares there are further variations worth knowing about. Cumulative preference shares are the most common type. If the company cannot pay the preference dividend in a particular year, the unpaid amount accumulates and must be paid before ordinary shareholders can receive anything in future years. Non-cumulative preference shares do not carry this protection. If the dividend is missed, it is simply gone. Participating preference shares are rarer and entitle the holder to a share of any additional profits above the fixed rate, giving them a partial upside alongside their guaranteed income. Convertible preference shares can be converted into ordinary shares at a set price, which can be valuable if the company grows strongly.

Deferred shares are the least common of the three and the least likely to appear in an everyday investor’s portfolio. They are sometimes called founders’ shares. As the name implies, deferred shareholders are last in the queue for dividends. They only receive payment after ordinary shareholders have been paid, and often only once dividends exceed a certain threshold. In a winding-up, they are last for assets too. Deferred shares were historically used to give founders or early backers a separate class of economic interest while keeping voting control through a different mechanism. Today they crop up more in the context of employee share schemes or very small, closely-held companies. You are unlikely to encounter them when buying shares through a mainstream platform.

Understanding share classes becomes especially relevant in two situations. The first is when you are looking at income investing. Preference shares trade on the stock exchange and can offer a reliable income stream, which appeals to some investors, particularly in retirement. But the fixed nature of the income means it does not grow with inflation, and the price of preference shares is sensitive to interest rates in a way similar to bonds. When interest rates rise, the fixed income on a preference share looks less attractive compared to other options, and the price tends to fall as a result.

The second situation is when a company you own is taken over or faces financial difficulty. At that point, the class of shares you hold directly affects what happens to your money. Ordinary shareholders are usually the last group to be compensated in any restructuring or forced sale of assets. Understanding this helps set realistic expectations before you invest, rather than after the fact.

For most people starting out, ordinary shares are where the portfolio gets built and where most of the action is. But knowing that other classes exist, and having a basic understanding of what each one represents, makes you a more informed investor. It helps you read financial coverage more accurately and makes sense of situations that would otherwise seem confusing.

TL;DR — the short version

• Ordinary shares are the standard type of share: you own a slice of the company, receive dividends when declared, and benefit from any share price growth.
• Preference shares pay a fixed dividend and rank ahead of ordinary shareholders for income and in a wind-up, but usually come with no voting rights.
• Cumulative preference shares carry forward any missed dividends; non-cumulative preference shares do not, so a missed payment is simply lost.
• Deferred shares are rare, sitting last in the queue for dividends and assets, and are most commonly found in founder or employee share arrangements.
• Preference shares appeal to income investors but are sensitive to interest rate changes and offer no upside when company profits grow.
• In a takeover or liquidation, the type of share you hold determines what you are owed and in what order.

Nothing in this article is financial advice. Tax rules change frequently. Check the current ISA allowance, CGT exemption and relevant rules on HMRC’s website or consult a qualified financial adviser for your specific situation.

Money & Markets is a guide to personal finance and investing for people who want to understand the world they live in, updated as rules and markets change.

Disclaimer: The value of investments can go down as well as up, and you may get back less than you invest. This article is for informational and educational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent advice before making any investment decision.

This article is for informational purposes only and does not constitute financial advice. Investment values can go down as well as up. Always do your own research before making any financial decisions.