Preference Shares vs Ordinary Shares: Share Classes Explained

0:00 Welcome back to the Money mice, the podcast for South African retail investors who want to stop feeling like they're drowning in jargon and start navigating the markets like someone who actually knows what they're doing. I'm your host, Jay, and today we tackling a topic that often confuses new investors. Preference shares, ordinary shares, and those mysterious share classes you see tagged with letters like AB or even Z. And no, it's not a lucky dip alphabet soup. So when you log into your platform, when you read a company's annual report, you'll notice not all shares are created equal.

0:37 Some come with perks, some come with voting rights, and some are like the cousin who shows up to the Bri empty handed but still eats all divorce. So let's break it down into 3 buckets. Ordinary shares. The standard issue, the bread and butter of the JSE type thing. Preference shares is a more VIP arrangement with some special privileges and share classes. This is when companies decide to split their shareholding power with A's, B's and beyond. So ordinary shares, this is the default choice. Think of ordinary shares as the basics. Per burger, everyone gets 1.

1:16 You know exactly what you're biting into and it comes with two key things. Voting rights. You get Asiata Agm's. It's not exactly deciding the Springbok squad, but your vote does count in matters like electing directors or approving big deals. Dividends, well, maybe these are not guaranteed. If the company makes a profit and feels generous, you'll get your cut. If they don't, well too bad.

1:43 Ordinary shares are basically like our elections. You technically have a vote, but you never quite sure if it will translate into real change. For most retail investors in South Africa, this is what you buying when you pick up stocks on the JSE. Ordinary shares equals ordinary risks and ordinary rewards. Now let's look at preference shares, the VIP Q jumpers, preference shares.

2:09 Basically these guys think they're better than the rest of us and in some ways they are. So here's the deal. It has a different priority. Preference shareholders get paid dividends before ordinary shareholders. If cash is tight, good preference crowd eats first. There's also fixed rate dividends. Often these are set at a specific percentage. So while ordinary shareholders ride the roller coaster of profits, preference shareholders get a more stable, predictable payout. Voting rights.

2:40 Well, usually none. Preference shareholders are the silent rich uncles. They get their money, but they don't get to say a thing. Think of it like being at Woolies with a store card. You might not get the redesign of the miles, but you're getting your free cappuccino before the ordinary shoppers queue up for the toll. And here's the kicker. Preference shares are treated almost like interest by SARS, which means you pay tax like you've got a dodgy side hustle, but without the cash under the mattress. In South Africa, companies sometimes issue preference shares to raise capital without giving away voting power. Banks in particular love these because they can strengthen their balance sheets without losing control of the boardroom. Nowadays, share classes when A is better than B or not. So sheer classes A sheer B shares, sometimes even more exotic setups.

3:37 Why do companies do this? Well, quite simple control. Dual class structures allow funders or families to keep control of special voting rights even if they own fewer shares. For example, a company might issue A shares with full voting power and B shares with none. Ordinary investors get bees, the insiders keep the A's. Sometimes the classes differ on dividend rights too, like Ashes getting a higher payout than bees. It's like playing Monopoly with your younger cousin. They get to roll the dice, but you've already decided who owns Mayfair and Park Lane.

4:15 Or more locally. It's like parliament. Everyone's technically in the room but only a handful of calling the shots and the rest are just collecting their per diems and free lunches. So why does this matter to you, That average retail investor? South Africa? Well, risking ward number one. Ordinary shares give you upside but also volatility. Preferences give you more stability but less say when it gets to voting power.

4:44 In reality, you're one share in a giant like Naspers isn't swinging boardroom decisions. But it's good to understand when your shares carry no vote at all when we're talking dividends. If you're building a dividend focused portfolio, preference shares might sound attractive, but always check the terms. Some preference shares are fixed, others are linked to prime. Let's do some real world example. Banks and preferences.

5:12 Nedbank, Standard Bank and Absa have all issued preference shares over time. They provide investors with a fixed dividend but without the chaos of ordinary share volatility. Then we looking at family controlled businesses on the JSE. Dual class structures pop up occasionally, often to keep control within a family or founding group while still tapping public markets. So the catch?

5:37 Yes, there's always a catch. Preference shares might sound cushy, but here's the fine print. Dividends aren't guaranteed. If the company's really struggling, they can suspend preference dividends as well. Liquidity issues. Well, preference shares don't always trade as actively on the JSE, so you might struggle to sell them quickly if you need to.

6:01 Tax treatment well, as mentioned, saws often treats preference dividends as interest, which can change your after tax return. So always check the latest rules. So before you Sprint off and buy shares thinking you found a cheat code no, the rules of the game. Now let's bring this home with our trademark stock fell starter pack of stock lingo for this episode. Ordinary shares, well, that's standard shares with voting rights, possible dividends, rollercoaster risk, kind of like taking the hard train.

6:31 It's faster, but it might not actually go where you need to be. Preference shares, well, deliverance priority, fixed income style payouts, usually no votes. So it's like sitting in the VIP section that Orlando stadium, you've paid for comfort, but you don't control the playlist. Share classes, A/B, CC, not different rights often structured to protect insider control. Basically the shareholder version of do as I say, not as I do.

7:00 So, simple rule of thumb, ordinary shares are for growth preference, shares are for stability, and multiple classes are usually for the boardroom politics. And that's a wrap for today's episode of The Money Mice. While my jokes may be more confusing than the government's excuses for why an expensive chat session is better than improving the lives of citizens, remember this is not financial advice. Please do your own research.

7:24 Speak to a licensed advisor. Catch you in the next episode. Same time, same place, and same sarcasm.