Stockholders' equity in a corporation consists of different types of stock shares and retained earnings. Retained earnings refer to the money earned and kept for future use by the company. Stock shares refer to ownership of the company by individual stockholders. Companies issue two different types of shares to investors: preference (or preferred) and ordinary (also known as common). Several differences exist between these two types of shares.
The company uses a specific rate to calculate the dividend on preference shares. The company multiplies this rate by the stated value of each share to determine the amount to pay out in dividends on preference shares. Ordinary shares have no specific dividend rate. If the company chooses to issue a dividend, it is not locked into paying a specific amount on each share. Instead, it chooses the amount it wants to pay on ordinary shares.
Preference shareholders enjoy the benefit of receiving their dividend distribution first. As the company calculates the dividend amount to pay each shareholder, it calculates these amounts for the preference shareholders before it calculates the dividend rates for the ordinary shareholders. Ordinary shareholders receive their dividend payments last, assuming the company opts to pay them.
Companies sometimes find themselves closing the doors and ending the business. When a company liquidates, it pays its creditors first. Any value remaining after satisfying the creditors is then allocated to the shareholders. Preference shareholders receive their share of the company’s assets based on the value of the shares they own. After the preference shareholders receive their payments, any value remaining is divided among the ordinary shareholders based on the number of shares each shareholder owns.
Ordinary shareholders receive the right to vote on major company decisions, including mergers or acquisitions. These shareholders are entitled to one vote for each share they own. The more ordinary shares they hold, the greater impact their votes will have. Preference shareholders typically receive no right to vote on company decisions.