STSM071030 - Companies and shareholders: introduction: types of share

The commonest type of share, issued by all companies, is an ‘ordinary share’. The holders of a company’s ordinary shares are entitled to the residual income of the company after all prior charges have been paid. If the company goes into liquidation, the ordinary shareholders are entitled to the balance of the company’s assets after all the debts have been settled. This balance is called the equity of the company and so ordinary shares are also sometimes called ‘equities’.

Some companies also issue preference shares. As the name suggests, holders of these shares have prior rights to dividends that rank above those of the holders of ordinary shares. In a liquidation, preference shares entitle the holder to repayment in priority to holders of equity shares. Preference shares often carry an entitlement to dividends at a fixed rate and are sometimes referred to as ‘preferred shares’.

A less common type of share is the deferred share. Holders of deferred shares are only entitled to a dividend if the ordinary shareholders have been paid a specified minimum dividend. If the specified minimum dividend is not paid to ordinary shareholders, then the holders of deferred shares receive nothing.