CAPITAL MARKET MODULE: COMMON & PREFERRED SHARES
MODULE OBJECTIVES:
By the end of this module, students should be able to:
1. Define and differentiate between common shares and preferred shares.
2. Understand the rights and privileges of common and preferred shareholders.
3. Analyze the advantages and disadvantages of investing in each type of share.
4. Evaluate real-world examples of equity offerings.
5. Apply knowledge in identifying which investment suits specific financial goals or risk
profiles.
A. COMMON SHARES
Common shares represent ownership in a corporation and a claim (dividends and voting
rights) on part of the company’s profits.
Key Features:
1. Voting Rights: Typically, one vote per share on corporate matters (e.g., board
elections).
2. Dividends: Not guaranteed. Paid out of profits at the discretion of the board.
3. Capital Gains: Investors benefit from an increase in share price.
4. Residual Claim: Last in line to claim assets in case of liquidation.
Rights of Common Shareholders:
1. Right to vote
2. Right to receive dividends
3. Right to inspect corporate books
4. Preemptive rights (in some jurisdictions)
5. Right to residual assets after debts and preferred shareholders are paid
Advantages: Disadvantages:
1. Potential for higher returns via capital 1. Higher risk (last claim on assets)
appreciation 2. No guaranteed dividend
2. Voting power in corporate decisions 3. Price volatilitY
3. More liquid and commonly traded
Example: A company like Jollibee Foods Corporation issuing common shares to raise
capital, traded on the Philippine Stock Exchange (PSE).
B. PREFERRED SHARES
Preferred shares are a class of ownership with a fixed dividend and priority over common
shares in asset distribution but typically lack voting rights.
Key Features:
1. Fixed Dividends: Paid regularly before any dividend is issued to common shareholders.
2. No Voting Rights: Typically, no say in company governance.
3. Priority in Liquidation: Rank above common shares but below debt.
4. Convertible Options: Some preferred stocks can be converted into common shares.
Advantages: Disadvantages:
1. Predictable income through fixed 1. No (or limited) voting rights
dividends 2. Limited upside in capital appreciation
2. Priority over common shares in 3. Sensitive to interest rate changes
dividends and liquidation
3. Less volatile than common shares
Example: San Miguel Corporation issuing cumulative preferred shares at a fixed dividend
rate, appealing to income-focused investors.
Types of Preferred Shares:
1. Cumulative Preferred Shares: Unpaid dividends accumulate.
These are preferred shares where any missed dividends must be paid to shareholders
before any dividends can be paid to common shareholders in the future.
Key Points:
If a company cannot pay dividends in one year, the unpaid amount “accumulates.”
Accumulated dividends are called dividends in arrears.
Investors are assured of receiving all missed payments once the company resumes
dividends.
Example: If a company skips a ₱10 dividend this year, and it resumes paying dividends
next year, cumulative preferred shareholders will receive ₱20 (₱10 for this year + ₱10 for
next).
2. Non-Cumulative: Missed dividends are not paid.
These are preferred shares where missed dividends are not carried forward. If the
company skips paying dividends in one year, the shareholder simply loses that dividend.
Key Points:
No obligation for the company to pay missed dividends.
More risky than cumulative preferred shares from an income perspective.
May offer higher yields to compensate for the risk.
Example: If a company does not declare dividends this year, and you're holding non-
cumulative preferred shares, you will not receive that missed dividend—even if the
company becomes profitable next year.
3. Participating Preferred Shares: Additional dividends beyond the fixed amount.
These shares allow shareholders to receive fixed dividends plus an additional share in
company profits—after common shareholders receive a certain amount.
Key Points:
Offers more potential returns than regular preferred shares.
Shareholders “participate” in excess earnings.
Example:
If a company declares large profits, participating preferred shareholders may receive their
fixed ₱10 dividend plus a portion of any remaining dividends after common shareholders
are paid.
4. Convertible Preferred Shares: Can be converted into common shares.
These are preferred shares that give holders the option to convert them into a
predetermined number of common shares.
Key Points:
Offers flexibility to benefit from rising common stock prices.
Set conversion ratio determines how many common shares you get.
Once converted, holders lose preferred share privileges (like fixed dividends).
Example: A convertible preferred share with a conversion ratio of 1:5 can be exchanged
for 5 common shares if the investor chooses, usually at a predetermined time or stock
price.
5. Callable Preferred Shares: Can be repurchased by the issuer.
Callable (or redeemable) preferred shares can be bought back (redeemed) by the issuing
company at a predetermined price after a certain date.
Key Points:
The company has the right, not the obligation, to redeem the shares.
Investors may face reinvestment risk if shares are called during favorable market
conditions.
Usually includes a call premium (extra amount paid upon redemption).
Example: A company issues ₱100 callable preferred shares with a 5-year call option.
After 5 years, the company can repurchase them at ₱105.
COMPARATIVE ANALYSIS TABLE:
Feature Common Shares Preferred Shares
Ownership Yes Yes
Voting Rights Yes Usually No
Dividend Variable / Not guaranteed Fixed / Priority
Priority in Liquidation After preferred shareholders Before common shareholders
Capital Appreciation High potential Limited potential
Risk Level High Moderate
Convertibility No Some types can be converted
REFERENCES:
Bodie, Z., Kane, A., & Marcus, A. J. (2021). Investments (12th ed.). McGraw-Hill Education.
Fabozzi, F. J. (2021). Capital Markets: Institutions, Instruments, and Risk Management (5th
ed.). MIT Press.
Philippine Stock Exchange. (2024). Listed Companies. Retrieved from
https://www.pse.com.ph
San Miguel Corporation. (2024). Investor Relations. Retrieved from
https://www.sanmiguel.com.ph
