Equities & Shares

A share (also called a stock or equity) represents a unit of OWNERSHIP in a company. A shareholder is therefore a part-owner of the business, not a lender to it — this is the fundamental difference between equity and debt (bonds).

As a residual owner, a shareholder is entitled to a share of the company's profits and net assets ONLY AFTER all other claimants — employees, trade creditors, tax authorities, and bondholders/lenders — have been paid. Equity is thus the most JUNIOR claim on the company.

Shareholders earn a return in two ways: INCOME in the form of dividends (a share of distributed profits), and CAPITAL GAIN if the share can be sold for more than its purchase price. Neither is guaranteed.

Shareholders of a limited company enjoy LIMITED LIABILITY: their maximum loss is the amount they invested (paid for their shares). They are not personally liable for the company's debts beyond that.

ORDINARY (common) shares are the standard form of equity and carry the core ownership rights: voting at general meetings, a variable dividend, and a residual claim on assets in a winding-up. Ordinary shareholders bear the most risk and have the greatest upside if the company prospers.

PREFERENCE (preferred) shares rank AHEAD of ordinary shares for both dividends and return of capital in a winding-up, but BEHIND all creditors and bondholders. They typically pay a FIXED dividend and usually carry LIMITED or NO voting rights.

Common variations of preference shares include:

• •CUMULATIVE preference shares — if a dividend is missed (passed) in one period, the arrears accumulate and must be paid before any ordinary dividend can be paid. NON-cumulative shares lose a missed dividend permanently.
• •PARTICIPATING preference shares — receive the fixed dividend and may share in additional profits alongside ordinary shareholders.
• •REDEEMABLE preference shares — can be bought back by the company at a set date/price; irredeemable ones remain outstanding.
• •CONVERTIBLE preference shares — can be converted into ordinary shares on pre-set terms.

Because their income is more predictable and their claim is higher, preference shares are generally LESS risky than ordinary shares of the same company, but they also offer less potential for capital growth.