NSE #8: Understanding Stock -- common shares and preference shares

Today, I'll be explaining stocks.

I'll start with it's different names that confuse a lot of people -- shares, stock and stocks.

Shares are the units of a financial instrument. In our case, we'll say -- Shares are the units of a stock.
That takes us to -- what is a stock?

Stock is the capital of a company raised through the issue and subscription of shares.
And you say stocks when you are talking about several companies, each having it's own distinct stock.

The Nigerian Stock Exchange has a listing of over 170 stocks [or companies].
I have investments in 3 stocks -- GTB, Julius Berger Nigeria and Total Nigeria.
I have 24,680 shares of GTB stock.

I hope now you'll never be confused when you see shares, stock and stocks in any document.

Companies have two types of shares -- common/ordinary shares and preference/preferred shares. 

image: tradestation.com

Common or ordinary shares are the shares of a company that you can easily trade on the stock exchange. They are the ones you see in Punch Newspaper's NSE stocks price and activity page. They are the ones you trade when you open a stock brokerage account.

The preference/preferred shares are not easily traded. You often buy them directly from the company's issuing house. I almost bought one in 2008, it was First Inland Bank's preference shares. It was selling at N9.50 per share.
And it had the following specifications (which ordinary shares do not have) --

• A fixed dividend of 9.25% per annum on the offer price of N9.50
• The dividends are to be paid after tax (unlike bond interest payments)
• The dividends have preference over that to paid to ordinary shareholders. That's if there's anything left to pay them from.
• The dividends are non-cummulative. If for any reason the company couldn't pay this year, there's no payment carry-over. You shouldn't expect the missing year's dividend to paid another year. It's every year to its own.
• You can convert [30% or less] the preferred shares to ordinary shares on the 30th of April of every year, for the next 7 years.
• The Issuer can call the preferred shares anytime after the next 7 years. Meaning you'll be forced to sell the shares back to the company anytime after the 7 years tenor of the shares.

Common shares don't have any of such characteristics. And that's the simple difference between a common share and a preference share.

N.B. You will often see Common Stock and Preferred Stock, but I went with Common shares and Preference shares so as not to confuse you as regards the clarification between shares, stock and stocks. In reality, all a company's shares are grouped into common shares and preference shares. The common shares are collectively known as the company's common stock. While the preference shares are known as the company's preferred stock.