Ordinary (Equity) Shares.

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Ordinary (Equity) Shares

These are the most commonly issued class of share which carry the main risks and rewards of the business: the risk are of losing part or all of the value of the shares if the business loses money or becomes insolvent; the rewards are that they take a share of the profits - in the form of dividends - and debenture interest, taxation and after preference dividends (if any). When a company makes large profits, it will have the ability to pay higher dividends to the ordinary shareholders; when losses are made, the ordinary shareholders may recieve no dividend.

Companies rarely pay out all of their profits in the form of dividends; most retain some profits as reserves. These can always be used to enable a dividend to be paid in a year when the company makes little or no profit, always assuming that the company has insufficient cash in the bank to make the payment. Ordinary shareholders, in the event of the company becoming insolvent, will be last to receive any repayment of their investment: other creditors will be paid off first.

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Ordinary shares usually carry voting rights - thus shareholders have a say at the annual general meeting and at any other shareholders meetings.

Preference shares

Whereas ordinary share dividends will vary from year-to-year, preference shares usually carry a fixed percentage rate of dividend - for example, ten percent of nominal value. Their dividends are paid in preference to those of ordinary shareholders: but they are only paid if the company makes profits. In the event of the company ceasing to trade, the preference shareholders will also receive repayment of capital before ordinary shareholders.

Preference shares do ...

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