Preference shares, or preferred stocks, provide a number of benefits for the investor as well as the company.
Companies offer preference shares to raise capital. And these shares behave like a hybrid of stocks and bonds.
For investors, dividend payments are a regular and they have the preferred status over common stockholders. The downside is that they have no voting rights that common shareholders usually have.
Wibest Broker Education is the one that can help you
Pros
Dividends Payments Priority
As we have mentioned, the primary benefit for shareholders of preference shares is that they have a fixed dividend that must be paid before any dividends can be paid to common shareholders.
Although dividends are only paid if the company is profitable, there are some preference shares that permit the accumulation of unpaid dividends. These are called cumulative shares.
After a business is back on track and earning, all unpaid dividends are to be remitted to preferred shareholders before any dividends are given to common stockholders.
Claim on Company Assets
At the same time, in the case of bankruptcy and liquidation, preferred shareholders have a higher claim on company assets when compared to common shareholders.
This is the reason why investors with low risk tolerance find preference shares very much appealing.
The company also guarantees that dividends will be paid each year. However, if it fails to be profitable and it shuts down, the preference shareholders are compensated for their investments sooner.
Other Investor Benefits
There are many other benefits from preference shares.
Convertible shares, for one, let a shareholder trade in preference shares for a fixed number of common shares. This can be a really good option if the value of the common shares starts to rise.
Meanwhile, participating shares provide the shareholder the chance to enjoy additional dividends on top of the fixed rate should the company meet specific, predetermined profit targets.
For many investors, the mere variety of preference shares and the benefits that come with them are very good reasons to invest in this type of stock.
Now, let’s look at the cons.
Cons
No Voting Rights
Preference shareholders have no voting rights. And this may seem like a huge drawback for the investor. As for the company, this is quite advantageous.
That’s because preference shares mean the ownership is not diluted, not like when common shares are issued.
At the same time, the lower risk to investors may also mean that the cost of raising additional capital through issuing preference shares may be lower than what it would cost when issuing common shares.
Repurchasing Shares
Companies can also issue preference shares with a callability feature. The callability gives the company the right to repurchase shares at their discretion.
What that means is that if callable shares are issued with a 6% dividend and interest rates fall 4%, then the company has the right to purchase any outstanding shares at the market price.
It can then reissue the shares with a lower dividend rate. That means reduced cost of capital. This flexibility puts investors at a disadvantage.
Get your Forex Brokers List on their website
