Share:
Preference and Common Shares
What is the Difference and What to Look Out For?
Some companies have two types of shares, preference shares and common shares. While each share represents the same stake in the company, there is a crucial difference. Shareholders of common shares have the right to vote at a general meeting (GM), while preference shares are usually issued without voting rights. In return for this disadvantage, preference shareholders typically receive a “preferred,” i.e., usually higher dividend than common shareholders. The main owners (often the founders) can obtain new capital from shareholders without having to give up the majority of voting rights in case of a sale. It is therefore not uncommon for family-owned businesses to use two types of shares to maintain control over the company.
Development of Preference and Common Shares:
The prices of preference shares and common shares of the same company are rarely identical. Generally, their development also depends on supply and demand, which is why sometimes preference shares and sometimes common shares perform better, although the long-term development mostly runs in parallel. However, there are sometimes significant divergences, as was seen in the case of Volkswagen shares. Especially in 2021, the price deviation of common shares compared to the preference shares has been growing. The main reason for this was the strong interest of US private investors in the car manufacturer. Since VW shares are not listed on any US stock exchange, investment for US investors is only possible through certificates, the so-called American Depositary Receipts (ADRs) – and these are based on the common shares. This explains why the price of common shares significantly deviated from the price of preference shares. It took some time but the difference narrowed again.
Common Shares in Orange and Preference Shares in Blue:
Key Points:
- Common shares often rise ahead of an announced acquisition, as the buyer seeks a majority of voting rights.
- Common shares are particularly popular with institutional investors, as they often want to influence the management. In addition, some funds are only allowed to buy shares with voting rights.
- If an index only includes preference shares, it may be worthwhile to choose this type as they are traded more often and thus have higher liquidity.
Our Conclusion:
For long-term oriented private investors, preference shares are usually the better choice due to the higher dividend. The opportunity to influence decisions at the GM is already quite limited, as major shareholders usually hold the majority. Deviations in price development are usually balanced out in the long run, which is why neither preference nor common shares generally achieve better performance. However, common shares can be interesting ahead of an acquisition.
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