- PREFERENCE SHARES
NANMA E P
When it comes to investing in a company, preference shares offer a unique avenue that combines elements of both equity and debt. These shares, often referred to as "preferred stock," come with distinct features that make them an attractive choice for both investors and issuers.
Preference shares represent a class of ownership in a corporation that holds certain preferential rights and privileges over common shares. While they don’t typically carry the same voting power as common shares, they offer a range of benefits that can appeal to a variety of investors.
IKey Characteristics of Preference Shares:
Dividend Priority: One of the most prominent features of preference shares is their dividend priority. Holders of preference shares receive dividends before common shareholders. This can provide a steady stream of income, making them an attractive option for income-focused investors.
Fixed Dividend: Preference shares often come with a fixed dividend rate. This means that regardless of the company's financial performance, preference shareholders are entitled to receive their dividends at the agreed-upon rate.
Limited Voting Rights: In exchange for their dividend preference, preference shareholders typically have limited or no voting rights. This distinguishes them from common shareholders who have a more significant say in corporate decisions.
Liquidation Preference: In the event of a company's liquidation or winding up, preference shareholders have a higher claim on the company's assets compared to common shareholders. This adds an element of security to their investment.
Convertibility: Some preference shares may be convertible into common shares after a specified period. This feature allows investors to potentially benefit from future growth if the company's value appreciates.
Types of preference shares :
Convertible Preference Shares
Convertible preference shares are those shares that can be easily converted into equity shares.
Non-Convertible Preference Shares
Non-Convertible preference shares are those shares that cannot be converted into equity shares.
Redeemable Preference Shares
Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.
Non-Redeemable Preference Shares
Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date. Non-redeemable preference shares help companies by acting as a lifesaver during times of inflation.
Participating Preference Shares
Participating preference shares help shareholders demand a part in the company’s surplus profit at the time of the company’s liquidation after the dividends have been paid to other shareholders.
However, these shareholders receive fixed dividends and get part of the surplus profit of the company along with equity shareholders.
Non-Participating Preference Shares
These shares do not benefit the shareholders the additional option of earning dividends from the surplus profits earned by the company, but they receive fixed dividends offered by the company.
Cumulative Preference Shares
Cumulative preference shares are those type of shares that gives shareholders the right to enjoy cumulative dividend payout by the company even if they are not making any profit.
These dividends will be counted as arrears in years when the company is not earning profit and will be paid on a cumulative basis the next year when the business generates profits.
Non - Cumulative Preference Shares
Non - Cumulative Preference Shares do not collect dividends in the form of arrears. In the case of these types of shares, the dividend payout takes place from the profits made by the company in the current year.
So if a company does not make any profit in a single year, then the shareholders will not receive any dividends for that year. Also, they cannot claim dividends in any future profit or year.
Conclusion:
Preference shares occupy a distinctive space in the realm of investment options, offering a blend of income, security, and limited participation in corporate decisions. Investors seeking stable dividends and a measure of protection may find preference shares to be a valuable addition to their portfolios. As with any investment, thorough research and understanding of the specific terms and conditions of preference shares are crucial for making informed decisions that align with individual financial goals.