The difference between "common" stocks, preference shares and other out-of-the-ordinary shares

As well as "common" stocks that most investors hold, there are several different classes of share with varying terms and conditions. Matthew Partridge explains what they are.

Mostly when we talk about stocks and shares, we mean "common" stocks held by "ordinary" shareholders. The basic idea is that a share gives its owner a stake in the company and any dividends it pays out. However, there are several different classes of share with varying terms and conditions. We look at some below, but arguably the most interesting for most investors particularly income investors are "preference shares".

Preference shares (or "prefs") are equities with some bond-like characteristics. The dividend on a pref is usually fixed (like a bond coupon), so unlike ordinary shareholders, pref holders do not benefit from rising dividend payouts over the years. However, pref holders must be paid their dividends before ordinary shareholders can receive anything and if a pref is cumulative (as most are) then if any payments are missed, pref holders must be paid out in full before anything can be paid to ordinary shareholders. Also, if a firm goes bust, pref holders are ahead of ordinary shareholders in the queue. However, they still have less of a claim on assets than bondholders. A pref might also have a redemption date (a date when the firm can buy it back), something to watch out for if you are looking for a long-term source of income.

Prefs tend to be issued mainly by financial groups. In America, for example, financials account for more than 80% of the S&P US Preferred Stock index. It's similar here, with banks and insurers dominating the list of UK preference share issuers. Examples include Natwest 9% non-cumulative prefs (currently yielding around 6.3%, according to Canaccord Genuity), Lloyds Banking Group (6.4%) and Santander (6.3%). However, prefs in some non-financial firms, such as utilities Bristol Water (5.3%) and Northern Electric (5.2%), are also listed.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

You can invest in prefs through your usual broker, but be aware that they are less liquid than ordinary shares. This means the bid-offer spread (the gap between the price at which you can buy and the price at which you can sell) will often be quite wide (and therefore the transaction more expensive) than what you might be used to.

Four more out-of-the-ordinary shares

Preference shares are not the only "exotic" types of share. There are several other varieties, some of which we look at below.

If this isn't confusing enough, some companies issue multiple share classes, usually referred to by letters (for example, class A, B, C, etc), each with different voting rights and benefits. For example, Anglo-Dutch oil company Royal Dutch Shell has two classes of share, "A" and "B", which trade on the London Stock Exchange under the tickers RDSA.L and RDSB.L. Dividends paid on "A" shares are subject to Dutch withholding tax, while the "B" shares are not which is why it makes sense for most UK investors to favour the "B" shares.

Here are the other types of share that you might come across.

Non-voting share

Identical to an ordinary share, except it has no voting rights. This means that someone could end up owning the majority of a company, but still be unable to control it. Both Google and Facebook have issued share classes that allow their founders to maintain control in this way.

Convertible preference share

This is a preference share that comes with the right (but not the obligation) to convert it into an ordinary share at a pre-set price. Since this price is fixed, the value of the convertible will rise the higher the share price goes.

American depositary receipt (ADR)

A security issued by an American bank and listed on a US exchange, which entitles the holder to ownership of a number of shares in a company listed on a foreign exchange. It is a way for American investors to invest in a company without having to access a foreign stock exchange. Global depositary receipts (GDRs) are similar to ADRs, though listed on a non-US exchange.

Redeemable shares

These are shares that the company has promised to buy back at a certain date, or under certain circumstances (which will be stated). These are frequently used in employee-run firms to ensure that individuals who leave the firm aren't able to sell them to third parties. Preference shares can also be redeemable.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri