What are Preference shares?

Preferred Stock Definition

These shares are known as preferred shares. They are the shares that are granted priority for dividend payouts over other equity stocks. If the company decides that it will pay dividends, preferred stock or preference shares is given to selected shareholders. One way to define preferred shares is that they include holdings whose shareholders have the right of claiming dividends throughout the life of the company. If the company fails to perform and liquidates, those same preference shareholders can also claim capital repayments in the event of liquidation.

Preferred Stock Example

A simplified illustration of the workings of preferred stock can be used to help us define them. Let's say that Company C has 10,000 preferred shares it wants to distribute to its investors. These preference shares are priced at Rs100 and earn interest at 8% per year. In 2018, and 2019, C company did not pay dividends to preference shareholders.

The preference shareholders will be eligible for Rs2,40,000 in 2020 before the company can pay its regular shareholders. This is the cumulative dividend that all shareholders have earned over 3 years. When the company begins paying dividends, preference shareholders will have priority over other shareholders.

Preference shares benefits

Both the stockholders and issuer have advantages when they purchase preference stock. These benefits can be divided into one of these two categories.

Prefer stock is a great investment because it offers the following benefits:

Secured position Compared to common shareholders, preferred stock holders have a significantly better position. In the event of liquidation, they can first claim the assets of the company.

Fixed income: Investors can receive a fixed passive income via dividend payouts, depending on the company they are buying stocks in.

The following are the benefits of preferred stocks:

Flexibility The management and board members of a company have the freedom to set up preferred stock the way they choose. They can choose the proportion of preference shares that is most appropriate for their company in order to attract investors.

No dividend obligation: Certain types of preferred stock, such as cumulative preferred stocks, allow the issuer to defer dividend payments for investors. This allows the investor to defer dividend payments if they do not have sufficient funds. This policy allows them not to be responsible for paying every month, but to defer payments until funds become available.

PreferredShare sFeatures

These are the main differences between preference shares and common equity or debt.

Preference Share: With preference shares, shareholders have the advantage of receiving the dividend payment in priority to other stockholders.

Voting Rights Generally, stockholders do not have voting rights to the company's management. In exceptional cases, preference shareholders may be eligible to vote.

Preference over assets:Preference shareholders can also claim assets of the company in case it liquidates.

Convertibility Preference shares can be converted into a predetermined amount of non-preference shares. Investors have the option to change their holdings. The company may allow preferred stock to be converted before a certain date, or with the approval of the board.

Callability An issuer may repurchase preference shares by calling back at some point in the future. This is comparable to being converted into non-preference shares. The preference share can be repurchased by a company, which means that the company's ownership increases, rather than third-party investors.

Conclusion

Preference shareholders are a good way to reduce your risk of becoming a shareholder in a company. In the event of company liquidation, one can claim both dividends as well as company assets. There are many preferred shares available. If you wish to alter your company holdings, one can convert preference shares into nonpreference shares. A company can defer certain types of preference share payouts until they have enough funds to pay dividends.