Shares of companies are ordinary and preferred. The differences are related to two main rights – to vote and receive dividends.
- Ordinary. The most common type of shares. They always give the right to vote at the shareholders’ meeting, but do not guarantee dividends.
- Privileged. They have a predetermined amount of dividends – for example, a percentage of the company’s profits. Their owners can participate in voting only if they did not receive dividends at the end of the previous year.
Sometimes there are special types of preferred shares:
- Privileged non-voters. They have a fixed dividend and the right to receive payments in the first place, but do not allow voting.
- Privileged with special rights. The conditions for paying dividends and the possibility of voting are prescribed in the company’s charter. For example, the holders of such shares may be able to vote, receive priority in the payment of dividends and the right to be the first to buy new issues of shares. The charter may also contain any other rights that the company wants to grant to their owners.
It depends on the type of shares whether dividends will be paid to their owners and in what amount. If the meeting of shareholders decides to allocate part of the company’s profits to the payment of dividends, it will be distributed among the owners of preferred non-voting shares in the first place. For them, a fixed dividend is provided – a specific amount or percentage of the nominal value of securities. The owners of preferred non-voting shares participate in voting only in those cases when there is a question of liquidation of the joint-stock company.
Second in line for dividend payments are holders of standard preferred shares. The amount of dividends on these shares may be equal to a specific amount or a percentage of the par value of the share. But most often it is defined as a percentage of the company’s net profit at the end of the year, divided by the number of preferred shares. The procedure for calculating dividends is usually spelled out in the charter. The holders of such shares cannot vote in case of payment of dividends. But if dividends were not accrued, then at the next meeting they get the right to vote on all issues.
One joint stock company may have several types of preferred shares, including shares with special rights. The charter of the company should clearly fix the order in which dividends are paid to their owners. Therefore, before buying preferred shares, carefully study the charter of the joint-stock company.
Holders of ordinary shares can expect dividends only if the company fully fulfills its obligations to all preferred shareholders.
After the dividends are distributed, payments are made to all categories of shareholders of the company simultaneously.