What are preference shares
What preference means?
Preference means an interest in or desire for one thing more than another.
So, shares are broadly two type first ordinary share or equity share and second preference shares.
What exactly preference shares are?
"Preference shares have preferential rights over the ordinary shares".
Preferred stock, often referred to as preference shares, are shares that reflect ownership in a company and include features of both debt and equity.
The concept of preference shares exists to meet the diverse needs and preferences of investors and companies.
(Key Points to remember)
Key points to remember or features of preference shares :
- Dividends : Preference shareholders receive fixed dividends at a predetermined rate, which must be paid before any dividends can be distributed to common shareholders.
- Priority in Asset Distribution: Preference shareholders usually receive their investment returned before regular shareholders in the case of liquidation, giving them a superior claim on the company's assets.
- Voting rights: Typically, preference shareholders do not have voting rights in corporate decisions, unlike common shareholders who usually have voting power.
- Fixed Income: Preference shares and bonds are comparable in that they provide investors with a predictable income stream due to their set dividend characteristic.
- Less Volatility: Because preference shares have set dividends, their price volatility is often lower than that of regular stocks.
- Callable: Certain preference shares are callable, which means that after a specific date, the issuing business may choose to buy them back at a specified price.
- Convertible: In some cases, preference shares may be convertible into common shares, giving investors the opportunity to participate in potential capital appreciation.
Advantages of preference shares
- Diversification: By including securities with varying risk-return characteristics in their portfolios, investors can diversify their holdings.
- Fixed dividends: Offer a reliable source of income to investors. Distribution of assets based on priority: Provides protection in case of liquidation.
- Non-voting rights: Provides businesses with the ability to raise financing without sacrificing voting power.
- Less volatility: When compared to regular equities, preference shares usually have less price fluctuation.
- Flexibility in capital structure: Allows businesses to raise money while keeping control over corporate strategy.
Disadvantage of preference shares
- Callable features: Some preference shares are callable, allowing issuers to repurchase them, potentially resulting in a loss of future income to investors.
- Dependency on company performance: If the company has financial difficulties, preference shareholders may still not receive their dividends.
- Restricted voting rights: When it comes to company decisions, preference shareholders typically have no voting power.
- Possibility of lesser returns: In comparison to common stocks, fixed dividends may reduce the possibility of capital growth.
- Absence of involvement in business expansion: Preference shareholders might not gain from rises in the enterprise's worth or earnings.
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