1. Ordinary Shares
An ordinary share is an equity instrument that is subordinate to all other classes of equity instrument.
They participate in profit for the period only after other types of shares, such as preference shares have participated.
That means they’re last to get paid.
Ordinary shares are the most basic, standard type of share you can get, most of the time when someone says they own shares in a company, they mean ordinary shares.
If they own most of the ordinary shares, they’ll probably control the company.
Because preference shares receive a dividend before the ordinary shareholders, they hold more rights.
Exam Tip: If you notice there are preference shares in place in an exam question, do not use them in your EPS calculation
2. Preference Shares
A preference share is a divisible interest in a company, other than an ordinary share.
Preference shares usually receive preferential treatment, as the name suggests, in terms of a return or dividend, and the winding up of the company.
So look out for whether someone will get paid before the ordinary shareholders, they might be preferred shares.
3. Potential Ordinary Shares
A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.
Examples of potential ordinary shares include:
- financial liabilities or equity instruments, that are convertible into new ordinary shares. These include convertible debentures and convertible preference shares.
- share options and warrants. Options and warrants are financial instruments that give the holder the right but no obligation to buy new ordinary shares at a fixed time in the future and at a fixed price
- shares that would be issued upon the satisfaction of conditions resulting from contractual arrangement, such as the purchase of a business or other assets.
Diluted EPS and basic EPS will usually differ when there are potential ordinary shares in existence.