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.

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Dr Matthew Partridge
Shares editor, MoneyWeek

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