Definition
Deferred Ordinary Share refers to a specialized type of equity often issued to founders or early investors in a company. These shares diverge from the typical ordinary shares mainly due to their unique dividend entitlement structure. There are two primary types of deferred ordinary shares:
Founder’s Shares: These entitle holders to dividends only after dividends on all other classes of ordinary shares have been paid. Although they rank lower in dividend priority, they can potentially claim a disproportionate share of the profits once all other shareholders have been satisfied.
Growth Shares: These shares come with a moratorium on dividends for a specific period. During the initial phase, these shares receive little to no dividends. However, post this period, they align with conventional ordinary shares concerning dividend rights.
Strategic Significance
From an investor’s perspective, taking a punt on deferred ordinary shares might seem like backing the dark horse in a race against thoroughbreds. While they initially offer minimal immediate gratification in terms of dividends, the long game could be quite lucrative, particularly if the company shifts from fledgling to titan.
Investment Appeal
The allure of deferred ordinary shares lies in their potential for high returns. Like waiting for a fine wine to mature, investors in these shares could be richly rewarded for their patience and foresight. These shares represent a vote of confidence in the company’s long-term prospects rather than its immediate performance.
Risks and Rewards
However, with great potential comes heightened risk. The “deferred” aspect might as well apply to the gratification investors must endure before seeing any financial returns. The winding wait for dividends can be off-putting for those accustomed to the steady percussion of periodic payouts.
Related Terms
- Ordinary Share: Common stock that entitles the holder to dividends and other rights like voting in general meetings.
- Preference Share: Shares which have priority over ordinary shares for dividend payments and capital repayment, but typically do not have voting rights.
- Cumulative Preferred Stock: A type of preferred stock where dividends accrue, ensuring that all missed payments are made up to preferred shareholders before any dividends can be issued to ordinary shareholders.
Suggested Reading
For those looking to dive deeper into the vibrant world of stock classifications and investment strategies, the following titles might tickle your financial fancy:
- “The Intelligent Investor” by Benjamin Graham: A masterpiece offering insights into value investing and includes principles that are particularly relevant to understanding different types of shares and their risk profiles.
- “Common Stocks and Uncommon Profits” by Philip Fisher: Explore the potential of growth investing and the analysis necessary to identify long-term gains in stocks like deferred ordinary shares.
By grasping the complex yet intriguing nature of deferred ordinary shares, investors can intelligently navigate the convoluted waters of equity investment, armed with knowledge and seasoned with just a pinch of daring.
