How does preference shareholders generally compare to ordinary shareholders in terms of profit distribution?

Preference shareholders generally receive profits before ordinary shareholders because they have a priority claim on dividends. This means that when a company distributes its profits, it must first satisfy the dividend obligations to preference shareholders before any profits can be distributed to ordinary shareholders. Preference shares often come with fixed dividends that are payable at specific rates, ensuring that preference shareholders have a more predictable return on their investment compared to ordinary shareholders, whose dividends can fluctuate based on the company’s profitability and board decisions.

Because of this priority arrangement, in the event of limited profits or a company facing financial difficulty, preference shareholders are more likely to receive their expected returns before any distributions are made to ordinary shareholders. This characteristic is central to the nature of preference shares and distinguishes them from ordinary shares, which only receive a dividend after all obligations to preference shareholders have been met.