The main difference between the ordinary and preference shareholders is that?

A. the former have voting rights while the latter does not
B. in the case of winding up, the former are paid first before the latter
C. the latter are not members of the company while the former is
D. the former receives dividends while the latter do not

Correct Answer:

Option A – the former have voting rights while the latter does not

Explanation

An ordinary share defines a single unit of equity ownership of a corporation, where the holders of the ordinary shares receive the right to cast a vote in decisions involving important corporate matters. Such votes are available to each ordinary shareholder in correspondence to the number of ordinary shares held within the company. Ordinary shareholders are the last to receive dividends, and are only entitled to funds which remain after dividends on preferred shares are paid. Ordinary shareholders may not receive dividend payments every year, and payments to ordinary shareholders depend on reinvestment decisions made by the company directors. In an event of the company facing liquidation, the ordinary shareholders will be the last to receive their share of funds, after the creditors and preference shareholders are paid. As such ordinary shares are riskier than bonds or preference shares. Ordinary shares are also referred to as ‘common stock’.

Preference shares are offered preference in relation to ordinary shares, where the preference shareholder receives dividends before ordinary shareholders are paid out. Preference shareholders are paid a fixed dividend and have the first claim on the assets and earnings. As such, preference shareholders receive their share of the firm’s residual value before ordinary shareholders in the event of liquidation. Preference shareholders do not have voting rights.