When most people think of stocks, they think of ordinary shares — what in English are called common shares. But many companies also issue another class: preferred shares.
Preferred shares are not better or worse than common shares — they are simply different, and suit different types of investors and situations.
What makes preferred shares special?
Preferred shares combine characteristics from both stocks and bonds:
- Priority on dividends: Preferred shareholders receive dividends before common shareholders
- Fixed dividends: The dividend is often set in advance — for example 5% of face value each year
- Priority in bankruptcy: If the company goes bankrupt, preferred shareholders are paid out before common shareholders
- No voting rights: In most cases, preferred shares do not carry voting rights at the general meeting
Rule of thumb: Preferred shares = more security, less influence. Common shares = more influence, more risk.
Different types of preferred shares
Cumulative dividends
If the company does not pay a dividend one year, it accumulates and must be paid out later before common shareholders receive anything. This provides extra protection for the investor.
Non-cumulative dividends
Missed dividends are lost forever — they do not accumulate. Higher risk for the investor.
Convertible preferred shares
Can be converted into common shares at a specific time or at a specific price. Provides an opportunity to participate in price growth if the company performs well.
Callable preferred shares
The company has the right to buy back the shares at a fixed price after a certain date. Useful for the company, but can limit the upside for the investor.
Preferred shares vs. common shares
Preferred shares
- Fixed or predictable dividends
- Priority in bankruptcy and on dividends
- Lower risk than common shares
- Limited price growth
- No (or limited) voting rights
Common shares
- Variable dividends — or none at all
- Last in line in bankruptcy
- Higher risk, higher potential return
- Full price growth potential
- Voting rights at the general meeting
Preferred shares vs. bonds
Preferred shares resemble bonds because they often pay fixed dividends, but there are important differences:
- Dividends on preferred shares are not guaranteed the way interest on bonds is
- In bankruptcy, bondholders come before preferred shareholders
- Preferred shares can rise in price, while bonds have a fixed redemption value
Note: Preferred shares are safer than common shares, but not as safe as bonds. They occupy a middle position in the risk hierarchy.
Where are preferred shares used?
Preferred shares are most common in:
- Banks and financial institutions — use preferred shares to meet capital requirements
- Start-up companies — venture capitalists often invest via preferred shares to secure priority
- Real estate companies (REITs) — issue preferred shares for stable financing
- American stock exchanges — preferred shares are far more common in the US than on Oslo Stock Exchange
Are preferred shares available on Oslo Stock Exchange?
Preferred shares are uncommon in Norway compared to the US. On Oslo Stock Exchange, the concept is most often encountered in connection with foreign companies or start-up share issues. Norwegian companies more commonly use A and B shares instead, where A shares typically carry voting rights and B shares do not.
Rule of thumb: Preferred shares are best suited for investors who prioritize stable income over high growth — and who want a little more protection than common shares provide.