Unbelievable Features of Preference Shares

Unbelievable Features of Preference Shares

In the diverse world of financial investments, preference shares represent a unique blend of equity and debt features, offering specific advantages to both issuers and investors. Often overlooked in favour of common stocks or bonds, preference shares can provide strategic benefits in a balanced portfolio.

This article will explore the nature of preference shares, delve into their top features, and discuss how they can improve your financial health, especially when traded on platforms like the Bombay Stock Exchange.

What are Preference Shares?

Preference shares, also known as preferred stocks, are shares of a company’s equity that carry rights and benefits different from those of ordinary shares. Typically, preference shares provide holders with a fixed dividend, which must be paid out before any dividends are given to common stockholders.

Example: If a company issues preference shares with a 5% dividend rate and a par value of $100, each share receives an annual dividend of $5. In the event of bankruptcy, preference shareholders have priority over common shareholders in asset distribution but remain subordinate to debt holders.

Top 10 Features of Preference Shares

Preference shares, also known as preferred stocks, offer a unique blend of characteristics between bonds and common stocks. Here are the top ten features of preference shares, explained in detail:

1. Fixed Dividend Payments:

 Preferred shares typically come with fixed dividend payments, unlike common stocks where dividends can vary based on profitability. This fixed dividend is similar to the interest payment on a bond and provides shareholders with a predictable income stream. The dividend rate is usually stated as a percentage of the par value of the share.

2. Priority Over Common Shares:

In the hierarchy of corporate payouts, preference shares rank above common shares but below debt securities, such as bonds. This means that dividends to preferred shareholders must be paid before any dividends can be distributed to common shareholders. Additionally, in the event of a company liquidation, preferred shareholders have a higher claim on assets than common shareholders, although they are still subordinate to creditors.

3. Cumulative Dividends:

Many preferred shares are cumulative, meaning that if a company suspends dividend payments, the dividends accumulate and must be paid out before any dividends can be paid to common shareholders. This feature provides a level of protection to investors, ensuring they receive their expected returns before any profits are shared more broadly.

4. Non-Cumulative Dividends:

Some preferred shares are non-cumulative, which means if the company decides not to pay a dividend in a given period, the dividend is not owed and does not accumulate. These shares typically offer a higher yield to compensate for the increased risk.

5. Convertible:

Convertible preferred shares can be exchanged for a predetermined number of the company's common shares. This feature allows shareholders to benefit from potential price appreciation of the common stock. The conversion can be at the discretion of the shareholder or triggered by certain events, providing flexibility and potential upside.

6. Callable:

These shares can be redeemed (or "called") by the issuer at a predetermined price after a specific date. This feature allows the issuing company to remove the shares from the market when it is financially advantageous, such as when interest rates fall and the company can issue new shares at a lower dividend rate.

7. Non-Callable:

Some preferred shares cannot be called by the issuer. These shares provide a stable, long-term income stream for investors without the risk of the shares being bought back prematurely by the issuer.

8. Participation Features:

Participating in preferred shares offers the possibility of additional dividends that go beyond the fixed dividend rate. These additional dividends are paid if the company achieves certain profitability targets, allowing preferred shareholders to share in the company's success similarly to common shareholders.

9. Redeemable/Retractable:

Redeemable or retractable preferred shares can be turned back to the company at the shareholder's option, usually after a set period. This feature provides investors with an exit strategy and flexibility in managing their investment portfolio.

10. Limited Voting Rights:

Typically, preferred shareholders have limited or no voting rights in company decisions, unlike common shareholders who can vote on issues such as electing the board of directors and approving mergers. However, in certain situations, such as the non-payment of dividends for a set period, preferred shareholders may gain voting rights to protect their interests.

These features make preferred shares an attractive investment option for those seeking a mix of income and stability with potential for capital appreciation, while also incorporating some protection against corporate actions that might adversely affect shareholder value.

Also Read: How AI Technology is Transforming Investing: Unlocking Stock Market Success

Benefits of Preference Shares and How They Improve Your Finances

Investing in preference shares can enhance your financial portfolio in several ways:

●   Steady Income Stream: The fixed dividends of preference shares provide a regular and predictable income, appealing to income-focused investors or those in retirement.

●   Lower Risk Than Common Shares: Given their priority in dividend payments and liquidation, preference shares are generally less risky compared to common shares.

●   Potential for Capital Gains: Convertible preference shares offer the potential for capital appreciation, as shareholders can convert their holdings into common stock when it benefits them financially.

●   Tax Efficiency: In some jurisdictions, dividends from preference shares are taxed at a lower rate than ordinary income, providing tax advantages to investors.

●   Flexibility in Investment Strategy: The redeemable and callable features of preference shares give both issuers and investors flexibility in managing their investments according to market conditions and personal finance goals.

●   Diversification: By adding preference shares to a portfolio, investors can achieve greater diversification, balancing between the aggressive growth potential of common stocks and the stability of bonds.

Conclusion

Download Bajaj Finserv App to explore preference shares, a strategic investment avenue providing a balanced risk-reward proposition. Offering fixed dividends, conversion rights, and priority in liquidation, preference shares are a valuable addition to a diversified investment portfolio. Mastering their unique attributes can enhance financial outcomes and fortify the strength of your investment portfolio.