Preference shares can be defined as shares that are granted priority over other equity shares for the payment of dividends. Preference shareholders are those who receive the first payouts if the company decides not to pay dividends. Another way to describe preference stock is holdings that allow shareholders to claim dividends throughout the life of the company. If the company fails to perform, those same shareholders can also claim capital repayments.
These are the main differences between preference shares and common equity or debt.
Preference to assets: Priority shares give preference stockholders priority over non-preferential stockholders in claiming company assets in liquidation.
Dividend payouts Preferential stocks allow stockholders to receive dividend payments in situations where others may not be receiving dividends or may have received dividends. Payouts can be fixed, floating or both depending on the benchmark interest rate.
Dividend Preference A preference share gives a shareholder the benefit of receiving the dividend first, or on priority, compared to other stockholders.
Voting Rights In some cases, preference shareholders may be eligible to vote in the event of an extraordinary circumstance. The purchase of stock in a company does NOT give you voting rights in its management.
Convertibility. Preference stock can also be converted to common stock. If one wishes to alter their holdings, they can be converted into common stock by converting them into a predetermined amount of non-preference shares. Some preference shares let investors know that they can be converted past a certain date. Others may need permission from the company's board.
Callability Preference share features include the ability to call or repurchase the issuer at any time in the near future. The company will also allow one to reissue their preference shares at a future date.
You have a wide range of options when it comes to the type of preferred stock you can choose from. The type of preferred stock that one gets will depend on the company from which they are purchasing it.
Convertible preferred stocks: As described, this type of preferred stock may be converted into a number of common shares.
Perpetual preferred share: These preference stock are so flexible that shareholders don't have to set a date for when they will get back their capital.
Preferable stock that can be traded for other security: This type of preferred stock may be swapped for another type of security, if necessary.
Cumulative preferred share: These preference shares allow for a missed dividend payment, which can be added to the next one.
Preference stock not only gives investors priority in receiving dividends, but also offers benefits to the issuer as well as the stockholder. These benefits can be divided into two categories.
The following benefits are available to the issuer:
There is no dividend obligation. Cumulative preferred stocks allow the issuer to defer dividend payments. If the company does not have enough dividend funds, they can pay their investor later.
Flexibility The company's board and management have the freedom to sue preferred stock for setting up terms that suit them.
Prefer stock is a great investment because it offers the following benefits:
Secured position Those who have preferred stock are significantly safer in the event of a company's liquidation than common shareholders. The advantage of the preferred stock is that it can be claimed first on assets.
Fixed income Investors can get a fixed passive income through dividend payouts depending on the preference share they have chosen.
Preference shares can be a smart way to gain a preference position within a company's shareholder group. If the stock is liquid, the preferred shareholder can claim dividend payments. The issuer has the ability to make terms and conditions for preferred shareholders, including giving holders voting rights in exceptional circumstances.