How does the preferred share work

Common Stocks and Preferred Stocks: Meanings and Differences

A common share is a share which, when owned, has exactly one voting right at the general meeting.

The counterpart to the ordinary share is therefore the preference share, which does not contain voting rights, but is given preferential treatment in certain situations, for example when dividends are paid out.

If you add up the nominal values ​​of the ordinary shares and the preference shares, you get the total of the share capital.

If both types of stocks are in circulation in a company, it is important to decide which of the two stocks is cheaper for you before investing.

This can be very different as both stocks are subject to normal market fluctuations. And so it can happen that one time and the other time the other share promises the higher return.

More on this: Ordinary share or preferred share: which security is the better choice

How important voting rights are in common stocks

Voting rights are also important for ordinary shares. The first question that arises is what investors get from buying a share.

On the one hand, the shareholder has a voting right with which he can exercise his influence on the company at the general meeting.

So he is, so to speak, an owner of this company and consequently is entitled to part of the profits that the company generates.

Of course, after buying the share, the shareholder does not own the entire company, but the ownership corresponds to the proportion of the existing shares.

For example, if a company issued 1,000 shares and someone owns 10 shares, that shareholder owns 1% of the company.

The profit due to the shareholder is distributed to the shareholder at regular intervals in the form of a dividend.

In this case, one speaks of a dividend distribution. Another very important question is what price do you buy a share at.

Of course, you always want to get in as low as possible and get out as high as possible.

But before you actually invest in stocks at all, you should first find out a little bit about stock prices.

Difference between common and preferred shares

The prices for common shares and preferred shares develop differently in most cases. Find out why this is the case here.

Common Shares (“Common”) ...

  • ... entitle the respective shareholder to exercise his voting right at the general meeting in accordance with his share of the shares.
  • ... are particularly popular with institutional investors (banks, funds, investment companies) who want to use their voting rights to decide on the composition of the supervisory board, the amount of dividends and the discharge of the management board and supervisory board.
  • ... in the case of a company takeover are initially the strategically more important stocks.

Preferred Shares (“Preferred”) ...

  • ... like the ordinary shares, entitle them to participate in the general meeting.
  • ... unlike ordinary shares, do not have voting rights.
  • ... are given preferential treatment for dividends. The lack of voting rights is compensated with a higher dividend payment than with ordinary shares.
  • ... in the run-up to a company takeover often perform worse than the common shares of the same company. In the long term, however, the prices of common and preferred shares will converge again. After all, they ultimately represent the same share of a company's share capital.
  • ... even price higher than ordinary shares if they are the more liquid (i.e. more frequently traded) class of shares and are therefore represented in an index (for example the DAX).

Common Stock vs. Preferred Stock: A Small But Important Difference

As a shareholder, you might not really care whether you buy ordinary or preference shares; The main thing is that prices rise and you regularly receive attractive dividends.

In fact, however, the price development of ordinary and preference shares is often very different - and the dividends that are paid are also different.

If you know what these differences are, you can benefit greatly from them.

There are currently some common and preferred stocks that promise huge profits for the future.

Definition: Not all shares are the same

In the case of companies that have issued both ordinary and preference shares, the nominal values ​​of both share classes together form the share capital. The most important differences: Ordinary shares (abbreviated: ordinary shares) are shares that entitle their holder to vote at the general meeting.

The voting right is based on the number of shares that a shareholder has in his or her portfolio. By voting, a shareholder decides, among other things, on ...

  • ... whether the actions of the board of directors and the supervisory board are discharged
  • ... how the board of directors is composed and
  • ... how high the dividend will be.

Preference shares (or preference shares for short) represent the same proportion of the company's share capital as ordinary shares. In contrast to these, however, they do not have voting rights.

The holders of privileges are invited to the Annual General Meeting, but they are not allowed to vote there. In return, waiving the right to vote brings financial advantages.

As a rule, preferred shareholders receive a higher dividend than common shareholders. If a stock corporation pays its preferred stockholders no more than the common stockholders, the preferred stockholders have a special right to vote.

This right exists until the preference (i.e. the financial benefit) has been paid out in full (Section 140 (2) of the German Stock Corporation Act). Please note: a maximum of 50% of all shares in a listed company may be preferred shares. The remainder must be issued as ordinary shares.

The banks have made provisions There is a light at the end of the tunnel for the banks, because many credit institutions already made good provisions in the first half of the year. > read more

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