Preference shares are issued by companies who want to raise capital. They are those shares that carry exclusive rights and priorities over ordinary shares. It has preference over common shares in the payment of dividends and the distribution of the organization’s assets in the event of a liquidation.
Features Of Preference Shares
- Preference shares are shareholdings in the company like ordinary shares, but they are different. Dividend payable to ordinary shareholders is not fixed. They are based on profits after preference shareholders have received their dividends. Dividend payable to preference shareholders is fixed and paid before any ordinary shareholders can be paid.
- Typically, preference shares do not get voting rights in the company. But there may be some exceptions that give them such rights. This exception includes but not limited to – when dividends are not paid or for convertible preference shares.
- There are two types of preference shares and namely “cumulative” or “non-cumulative”. A cumulative preference share will have any unpaid dividends from the previous year moved to the following year before any ordinary dividends are paid. At the same time, non-cumulative preference shares do not make provisions for any unpaid dividends from the previous year. The dividends of a particular year are treated independently of each other – no payment of past dividends.
- Preference shares come in different forms depending on specific situations. Sometimes preference shares can be “callable” – this means that the shares can be redeemed by the issuing company for a fixed pre-agreed price.
- There are other features of preference shares which make it a flexible form of investment. If you are looking to invest in preference shares – it is essential to understand the various types in which it operates and how they fit into your budget and financial objectives.
Benefits Of Investing In Preference Shares
Investing in preference shares has a lot of advantages as it gives the investor some special treatment over other forms of investors and they are listed as follows;
- Apart from being paid their dividend before common shareholders, they enjoy a fixed rate of dividend
- It is a hybrid form of investment as it has combined characteristics of debt and equity investments
- It is suitable for investors who want to enjoy a level of safety on their investments with a fixed dividend rate.
- Preference shares are flexible. They are sometimes issued based on the goal of the company in a given period. They could be convertible, or even for a fixed period
- In the event of liquidation, they also enjoy priority benefits in the distribution of the company’s assets.
- They can enjoy additional investor benefits like voting rights or extra dividends that are above the fixed rate.
- They usually have more returns than a corporate bond and ordinary shareholders from the same company.
In conclusion, preference shares also have its disadvantages which mostly includes – no voting rights and low return on investment when the company is performing high are the primary two disadvantages. Still, the advantages most time make up for these shortcomings.
There is also a smaller market for preference shares which can make its stock very hard to sell or buy. So you might need a professional to help you out with securing a good investment in preference shares.
If you are a cautious investor, then you might want to go for investment in preference shares.