Preference Share
Preference shares, also known as preferred shares, are a type of equity security that offer investors certain preferential rights over common shareholders. Here are some key pointers to help you understand preference shares:
- Dividend payments: Preference shareholders have the right to receive a fixed dividend payment before any dividends are paid to common shareholders. This provides investors with a steady income stream, making preference shares a popular investment option for income-seeking investors.
- Voting rights: Unlike common shareholders, preference shareholders typically do not have voting rights in the company’s decision-making process. However, some companies may offer voting rights to preference shareholders under certain circumstances.
- Liquidation preference: In the event of the company’s liquidation, preference shareholders have a higher priority over common shareholders when it comes to receiving proceeds from the sale of assets.
- Redemption: Some preference shares are redeemable, meaning the company has the right to buy back the shares at a certain price after a specified period of time. This feature provides investors with some degree of flexibility in terms of their investment horizon.
- Cumulative preference shares: Cumulative preference shares have a feature that allows unpaid dividends to accumulate and be paid in the future. This can be attractive to investors looking for a consistent income stream.
- Types of preference shares: Companies can issue different types of preference shares such as convertible preference shares, participating preference shares, and non-participating preference shares. Convertible preference shares can be converted into common shares, while participating preference shares have the right to participate in any additional dividends paid to common shareholders.
Preference shares offer investors a unique combination of fixed income and equity-like features. By understanding the key pointers mentioned above, investors can make informed decisions about investing in preference shares and potentially benefit from their steady income stream and preferential treatment in the event of the company’s liquidation. However, it’s important to note that investing in preference shares carries a higher level of risk than investing in fixed-income securities and requires careful consideration of one’s investment goals and risk tolerance.
