Preferred shares (also called preferred stock or preference shares) refer to securities that characterize ownership in a business, and that feature a precedence claim over typical shares on the firms assets and earnings. The shares are more superior than general stock but are more inferior in association with the bonds in terms of claim on assets. Holders of preferred stock also get preference over receptacles of common stock in dividend payouts. You can consult one of the top 10 stock brokers in India to know more about preference shares.
What are the advantages of preference shares?
Preferred shares boast of a unique mix of features that distinguish them from debt or general equity. Though the terms may differ, the following features are mutual:
- Preference in terms of assets on liquidation: The shares lend shareholders with priority over common stock holders when it comes to making a claim for the company’s assets upon liquidation.
- Dividend outgoings: The shares give dividend payments to shareholders. The payments can be immovable or floating, based on an interest rate standard such as LIBOR.
- Preference in dividends: Preferred shareholders get a priority in dividend payments as compared to the holders of the common stock.
- Non-voting: Usually, the shares do not allocate voting rights to their holders. However, some preferred shares enable its holders to vote on unexpected events.
- Transferability to common stock: Preferred shares may be transformed to a programmed number of common shares. Some preferred shares stipulate the date at which the shares can be changed, while others need approval from the board of directors for the adaptation.
- Callability: The shares can be bought back by the issuer at stated dates.
Preference Share – Types
Preferred stock is considered as a highly flexible type of security. They can be:
Convertible preferred stock: The shares can be rehabilitated to a predetermined quantity of general shares.
Growing preferred stock: If an issuer of preference shares slips a dividend payment, the payment will be included in the next dividend payment.
Redeemable preferred stock: The shares can be exchanged for some other kind of security.
Continuous preferred stock: There is no fixed timeframe on which the shareholders will get back the invested capital.
The resemblance between Preference Shares and Bond
Interest Rate Understanding: Like any other fixed-income tool, preference share is also reactive to interest rates. If the market is providing higher interest than the rate of dividend, the market value of preference share reduces
Callability: The preference shares can be revoked by the provider, which is fundamentally called the redemption of shares, at a fixed price and time. This takes place when the firm has to pay a higher dividend on the shares than the usual market rate of interest
Seniority: Bonds and Preferences shares are superior instruments in that they rank better than general shares. In bankruptcy scenario, the due amount for senior securities is managed first.
Credit Rating: Alike bonds, preference shares also get a credit rating allotted from credit rating firms such as Moody’s on the basis of the quality of the company and payment of dividends
Make sure you choose the best stock broker in India to proceed with preference shares.
FAQs
Can Preference Shares be eligible for a buy-back?
Similar to common equity, preference shares too can be rebought. Redemption of preference shares at maturity is not required as they are not eligible for buy-back like equity shares.
Can Preference shares be allotted at a premium?
Yes, preference shares can be provided at a premium.
How Preference Shares are similar to Equity Shares?
Classification: Alike any other equity tool, preference shares refer to paid dividends from profit after tax.
What are the major reasons to buy preference shares?
- Steady income in the form of dividends
- Better potential for returns in comparison to bonds
- Lower risk as compared to common shares can be appropriate for risk-averse investors
- Dividend income on preference shares is tax-free up to Rs 10,00,000 (relating to Indian tax laws)
