When most people think of investing in stocks, they mean ordinary shares — the common stock you buy on Freetrade or Trading 212. But the capital structure of most companies is more complex. Preferred shares and warrants sit at the intersection of debt and equity, and understanding them gives you a much clearer view of who owns what — and who gets paid first when things go wrong.
Preferred shares sit between bonds and ordinary shares in the capital structure. They typically carry a fixed dividend that must be paid before ordinary shareholders receive anything. In a bankruptcy, preferred shareholders are paid out before ordinary shareholders (though after bondholders).
The trade-off: preferred shareholders usually have no voting rights, and while they get their fixed dividend reliably, they don't participate in share price appreciation. If the company doubles in value, ordinary shareholders double their money. Preferred shareholders still get their fixed dividend.
When you read about a startup raising a Series A, those investors almost always receive preferred shares. This is important — it means they get paid back before founders and employees in a sale.
A VC invests £10m for 20% of a startup as preferred shares with 1× liquidation preference. The startup sells for £30m.
VC gets: £10m back first, then 20% of remaining £20m = £4m. Total: £14m.
If the startup sells for only £8m, the VC takes all £8m — ordinary shareholders get nothing, despite owning 80%.
A warrant is the right — but not the obligation — to buy shares at a specific price (the exercise price) at any time before an expiry date. Similar to call options but usually longer-dated, often issued directly by the company as part of fundraising.
If shares never reach £5.00 before expiry, the warrant expires worthless.
Companies issue warrants as sweeteners — if the company does well, the investor gets extra upside. SPACs historically issued warrants to early investors. During COVID, airlines issued warrants to the government as part of bailout packages — giving taxpayers potential upside if the companies recovered.
When warrants are exercised, new shares are issued — which dilutes existing shareholders. If a company has 100m shares outstanding and 10m warrants get exercised, there are now 110m shares. Every existing shareholder owns a slightly smaller percentage. Heavy warrant or option issuance tracked over time can significantly erode returns even in a growing company.
The fully diluted share count: when reading a company's financials, "fully diluted" includes ordinary shares plus all potential shares from warrants, options, and convertible instruments. Some companies' fully diluted count is 20–30% higher than their basic share count — meaning ownership is being gradually diluted by employee and investor options. Always check both numbers.
That wraps up the Stocks section. You now understand how trades execute, what valuation means, how companies return capital, the full range of equity instruments, and the rules — and how they're broken. Next up: Bonds.
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