Preferred Shares vs Common Shares: Structure, Rights and Accounting
Quick answer: Preferred shares give priority in dividends and liquidation but usually no voting rights. Common shares carry voting rights and receive dividends after preferred, but have higher growth potential.
Preferred Share Features
Preferred shares sit between debt and common equity. They pay a fixed dividend (or a dividend tied to a benchmark) and have priority over common shares in liquidation. However, preferred shareholders typically do not have voting rights.
Key features:
- Cumulative dividends: Unpaid dividends accumulate and must be paid before common dividends
- Participation rights: Some preferred shares also participate in profits above a threshold
- Liquidation preference: Paid before common shareholders in a wind-up
- Conversion rights: Many preferred shares are convertible into common shares
- Redemption: Company or holder can typically redeem at a predetermined price
Common Share Rights
Common shares are the basic voting ownership units of a corporation. Common shareholders:
- Have voting rights at shareholder meetings (typically one vote per share)
- Receive dividends when declared, after preferred dividends are paid
- Benefit from capital appreciation — their shares rise in value with company growth
- Are last in line in liquidation (after all creditors and preferred shareholders)
Comparison Table
| Feature | Preferred Shares | Common Shares |
|---|---|---|
| Voting rights | Usually none | Yes (one vote/share typically) |
| Dividends | Fixed or floating, priority over common | Variable, after preferred paid |
| Liquidation preference | Senior to common | Junior to all debt and preferred |
| Capital appreciation | Limited | Full upside participation |
| Convertibility | Often convertible to common | Not convertible |
Conversion and Redemption
If a preferred share is convertible, the holder can exchange it for a predetermined number of common shares. The conversion ratio is set at issuance and may be adjusted for stock splits or other corporate actions.
Redemption rights allow the company to buy back preferred shares at a set price (callable) or give the holder the right to sell back (puttable).
Accounting Treatment
Both preferred and common shares are classified as equity under IAS 32 / ASC 480. The proceeds from issuing preferred shares are split between:
- Equity: The stated value (or par value) of the shares
- Additional paid-in capital (APIC): The excess over stated value
Preferred dividends are recorded as a reduction of retained earnings (not an expense).
