Accounting – 5.3 Limited companies | e-Consult

Preference shares are typically considered less risky than ordinary shares because preference shareholders have a higher claim on assets and profits than ordinary shareholders. They receive a fixed dividend, which must be paid before any dividends are paid to ordinary shareholders. This fixed dividend makes them a relatively stable investment. However, the potential return on preference shares is usually lower than that of ordinary shares. The return is fixed, whereas the return on ordinary shares is variable and depends on the company's profitability.

Ordinary shares are considered riskier because ordinary shareholders have the last claim on assets and profits after all other creditors and preference shareholders have been paid. The return on ordinary shares is variable and depends on the company's profitability and future prospects. However, the potential return on ordinary shares is higher than that on preference shares. Ordinary shareholders benefit from the company's growth and success through potential capital appreciation and dividends.

In summary, preference shares offer a lower risk and lower return, while ordinary shares offer a higher risk and potentially higher return. This difference reflects the different claims on the company's assets and profits.