The Difference Between Ordinary and DVR Shares: An In-Depth Analysis

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Investing in the stock market requires a solid understanding of the various types of shares available. Among the many options, two categories often come up: Ordinary shares and Differential Voting Rights (DVR) shares. These two share types are fundamental to the equity structure of companies and offer different benefits and drawbacks to investors. Understanding the difference between Ordinary and DVR shares is crucial for making informed investment decisions. This blog will delve into the key distinctions between these two types of shares, exploring their characteristics, advantages, disadvantages, and their roles in an investment portfolio.

What Are Ordinary Shares?

Ordinary shares, also known as common shares, are the most prevalent type of equity issued by companies. They represent ownership in a company and entitle shareholders to vote on corporate matters, such as the election of the board of directors and major company policies.

Characteristics of Ordinary Shares:

1. Voting Rights: Each ordinary share typically grants the shareholder one vote per share. This voting right allows shareholders to have a say in the company’s major decisions.
2. Dividends: Ordinary shareholders may receive dividends, which are a portion of the company’s profits distributed to shareholders. However, dividends are not guaranteed and are paid only if the company decides to distribute them.
3. Capital Appreciation: Ordinary shareholders benefit from any increase in the company’s stock price, leading to potential capital gains when the shares are sold at a higher price than the purchase price.
4. Residual Claim: In the event of a company liquidation, ordinary shareholders have a residual claim on the company’s assets after all debts and liabilities have been settled. However, they are last in line, behind creditors and preference shareholders.
5. Risk: Ordinary shares are subject to higher risk compared to other forms of investment. The value of these shares can fluctuate widely based on the company’s performance and market conditions.

What Are DVR Shares?

Differential Voting Rights (DVR) shares are a relatively recent innovation in the equity market, designed to offer a balance between control and capital raising. DVR shares provide the same ownership rights as ordinary shares but with different voting rights.

Characteristics of DVR Shares:

1. Differential Voting Rights: DVR shares offer limited or enhanced voting rights compared to ordinary shares. Typically, a DVR share may carry fewer voting rights, such as 1/10th or 1/100th of the voting power of an ordinary share. However, in some cases, DVR shares may offer more votes per share.
2. Higher Dividends: To compensate for the reduced voting rights, companies often offer a higher dividend yield on DVR shares compared to ordinary shares. This makes DVR shares attractive to investors who prioritize income over control.
3. Lower Volatility: DVR shares tend to be less volatile than ordinary shares because they are generally less attractive to speculative investors. This makes them a more stable investment option, especially for long-term investors.
4. Discounted Price: DVR shares are usually priced lower than ordinary shares due to the reduced voting rights. This lower price provides an entry point for investors who are more interested in the financial returns than in participating in company decisions.
5. Capital Appreciation: Like ordinary shares, DVR shares can appreciate in value. However, the extent of capital appreciation may be less than that of ordinary shares due to the reduced demand from investors seeking voting power.

Key Differences Between Ordinary and DVR Shares

Now that we have a clear understanding of what ordinary and DVR shares are, let’s delve into the key differences between them.

1. Voting Rights:

The most significant difference between ordinary and DVR shares lies in voting rights. Ordinary shares grant shareholders one vote per share, giving them significant influence over company decisions. DVR shares, on the other hand, offer either limited or enhanced voting rights. Typically, DVR shares provide fewer votes per share, making them less attractive to investors who want to influence corporate governance.

Example: Suppose a company issues DVR shares with 1/10th the voting power of ordinary shares. If a shareholder owns 1,000 ordinary shares, they would have 1,000 votes. However, if they own 1,000 DVR shares, they would only have 100 votes.

2. Dividend Yield:

To offset the reduced voting rights, DVR shares often come with a higher dividend yield. This makes DVR shares appealing to income-focused investors who prioritize steady returns over corporate control.

Example: A company might offer a 2% dividend yield on ordinary shares but a 3% yield on DVR shares to attract investors who are less concerned with voting rights.

3. Price and Valuation:

DVR shares typically trade at a discount compared to ordinary shares. This discount reflects the reduced voting power associated with DVR shares. The discount can vary depending on market conditions, investor sentiment, and the specific rights associated with the DVR shares.

Example: If ordinary shares of a company are trading at $100, DVR shares might trade at $90 due to their lower voting rights.

4. Market Perception and Liquidity:

Ordinary shares are generally more liquid and have a higher trading volume compared to DVR shares. This is because ordinary shares are more widely recognized and sought after by investors who value both voting rights and capital appreciation. DVR shares, being less common and less liquid, may experience wider bid-ask spreads and lower trading volumes.

Example: An investor looking to quickly buy or sell shares might find it easier to do so with ordinary shares due to their higher liquidity.

5. Investor Base:

The investor base for ordinary shares tends to include a mix of retail and institutional investors, many of whom are interested in corporate governance and decision-making. DVR shares, on the other hand, tend to attract income-oriented investors who prioritize dividend returns and are less concerned with voting power.

Example: A pension fund or income-focused mutual fund might prefer DVR shares for their higher dividend yield, while activist investors might prefer ordinary shares for their voting rights.

Advantages and Disadvantages of Ordinary Shares

Advantages:

1. Control Over Corporate Decisions: Ordinary shareholders have significant influence over corporate policies, board appointments, and other crucial decisions.
2. Potential for High Returns: Ordinary shares offer the potential for capital appreciation and dividends, providing a balanced return profile.
3. Residual Claims: Ordinary shareholders have a claim on the company’s assets after all debts have been paid, offering potential recovery in liquidation.

Disadvantages:

1. Higher Risk: Ordinary shares are subject to market volatility and company performance, leading to potential capital loss.
2. Dividends Are Not Guaranteed: Unlike preference shares, ordinary shares do not guarantee dividends, which are dependent on the company’s profitability.
3. Dilution of Ownership: Issuance of additional shares can dilute existing shareholders’ ownership and voting power.

Advantages and Disadvantages of DVR Shares

Advantages:

1. Higher Dividend Yield: DVR shares often offer higher dividends, making them attractive to income-seeking investors.
2. Lower Volatility: The reduced appeal to speculative investors results in less price volatility for DVR shares.
3. Affordable Entry Point: DVR shares usually trade at a discount to ordinary shares, providing a cost-effective investment option.

Disadvantages:

1. Limited Voting Rights: The primary drawback of DVR shares is the reduced voting power, limiting the investor’s influence on corporate decisions.
2. Lower Liquidity: DVR shares typically have lower trading volumes and wider bid-ask spreads, making them less liquid than ordinary shares.
3. Potential for Lower Capital Appreciation: Due to the discount and lower demand, DVR shares may not appreciate as much as ordinary shares.

When Should You Choose Ordinary Shares?

Ordinary shares are ideal for investors who:

1. Value Voting Rights: Investors who want to influence company decisions and participate in governance will prefer ordinary shares.
2. Seek Capital Appreciation: If your primary goal is to achieve capital gains through stock price appreciation, ordinary shares are likely a better option.
3. Have a Long-Term Investment Horizon: Ordinary shares can provide substantial returns over the long term, making them suitable for investors with a long-term perspective.

When Should You Choose DVR Shares?

DVR shares are ideal for investors who:

1. Prioritize Income: If you are more focused on receiving regular dividends, DVR shares offer a higher yield and may be more attractive.
2. Are Less Concerned with Voting Rights: If corporate governance and voting power are not priorities for you, the lower price and higher dividends of DVR shares might be appealing.
3. Seek Lower Volatility: Investors who prefer a more stable investment with lower price fluctuations may find DVR shares more suitable.

Conclusion

Understanding the difference between ordinary and DVR shares is essential for making informed investment decisions. Both share types have their unique characteristics, advantages, and disadvantages. Ordinary shares offer greater voting power and potential for capital appreciation, making them suitable for investors who want to influence corporate decisions and benefit from long-term growth. DVR shares, with their higher dividend yield and lower price, are ideal for income-focused investors who are less concerned with voting rights.

Choosing between ordinary and DVR shares depends on your investment goals, risk tolerance, and preference for control over company decisions. By carefully considering these factors, you can make the right choice for your portfolio and optimize your investment returns.

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