My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com), teaching ACCA online courses to students from all around the world. This article will explain different types of shares in your ACCA FA/FR studies.
When a company issues shares, there might be different classes of shares, including ordinary and preference shares. The ordinary shares are the basic shares usually carrying voting rights to vote on company resolutions at the general meeting. General meetings are meetings held by the company and attended by shareholders, in which they will discuss the company's past performance and future outlook. Some family companies such as Daily Mail and General Trust may prefer non-voting ordinary shares because the family members can still control the company even though more shareholders are introduced.
These shares usually do not carry voting rights. They usually have a cumulative dividend feature, i.e., if preference shares dividends are not paid to the preference shareholders in any given years, those dividends must be paid first when the company decides to pay ordinary share dividends to ordinary shareholders in the following year, i.e., cumulating the unpaid dividends plus the preference share dividends due in the next year. This means that the preference shares dividends are preferred or ahead of the ordinary share dividends paid to ordinary shareholders.
If the business is wound up and the business has enough assets, the preference shareholders must be repaid before the ordinary shareholders. Either preference or ordinary share is quite risky from the investors’ perspective because they may not get the money back from the company if the company winds up. The shares issue is quite safe from the company’s perspective because the company does not need to pay dividends to those shareholders if the company does not plan to do so.
Other Types of Shares:
The company may issue other classes of shares including management shares, i.e., giving the directors additional votes on the resolution, for example, three votes per share instead of the normal one vote per share in the normal ordinary shares. Non-voting shares are normally issued to the employees enabling them to share the company’s profits rather than allowing them to vote at the general meeting. Different types of deferred shares could be issued, for example, dividends in these shares may be paid after all other classes of shares are paid, or paid at a certain date, or the shares cannot be traded until a certain date. Different classes of shares are allocated, termed Class A, Class B, or Class C shares.
Preference shares can be further divided into redeemable and irredeemable preference shares. Redeemable preference shares mean the money can be repaid to the investor in the future, for instance, in five years. Irredeemable preference shares do not need to be redeemed during the company’s lifetime unless the company winds up. To simplify the idea in respect of preference shares, we only look at these from the perspective of either redeemable or irredeemable. In the real scenario, many other features exist in preference shares. These include cumulative or non-cumulative dividends—a convertible feature in the preference shares, allowing for their conversion into ordinary shares at a future point—and the participating feature, allowing preference shareholders to share any additional profits apart from fixed preference share dividends after paying out the ordinary shareholders.
I hope this article helps clarify different types of shares that a company may issue. This topic is relevant to your ACCA Financial Reporting (F7 or FR) exam and ACCA Financial Accounting (F3 or FA) exam.
In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.