Types of shares

Ordinary Shares

These represent part ownership of the firm and may pay out dividends from time to time. They give the owner the right to attend and vote at the Annual General Meeting (AGM) of the firm, so you will have a say in how the company is run. However, if the company becomes bankrupt, the firm will pay off all other creditors before reimbursing ordinary shareholders with any remaining funds. Ordinary shares are the most common type of shares.

Preference Shares

Some companies for a variety of reasons have issued preference shares. These have special rights attached to them that vary from company to company. In general, preference shares give holders preference in either dividend allocations or voting rights or both. They will certainly pay out before ordinary shares in the event of a company being broken up.

Bonds

Sometimes a firm will issue bonds (also called debentures) in the company. Bonds are different from shares in that they represent a part of the company's debt, not a part of the ownership of the company. They confer no voting rights at all, but they do get paid out before shareholders in case of bankruptcy.

Bonds are long-term loans, which typically give the holder an absolute right to receive interest payments. Bonds generally have a fixed maturity date at which point the principal (i.e. the amount originally loaned) is repayable. An example of a company bond would be a Tesco 5-year bond paying 8% p.a. If it were issued in 1993, it would pay interest until 1998, when the principal would be repaid.

Sometimes, bondholders have the right to convert their bonds into ordinary shares at a fixed price on or before a certain date. These instruments are called 'convertible bonds', imaginatively enough.