Preference Shares

Preference Shares

Preference shares are a type of company security that grant their holders certain preferential rights over common shareholders, such as higher dividend payments, a larger claim on assets, or voting rights.

Key Features of Preference Shares:

• Prior Dividends: Preference shareholders receive dividends before common shareholders, even during periods of low profitability.
• Higher Claim on Assets: Preference shareholders have a higher claim on the company’s assets than common shareholders, which means they are paid off first in the event of bankruptcy.
• Limited Voting Rights: Some preference shares have limited or no voting rights, which gives the company more control over the shareholders.
• Higher Price: Preference shares typically trade at a higher price than common shares, due to their higher seniority and lower risk.
• Maturity Date: Some preference shares have a maturity date, at which they are redeemed by the company.
• Call Provisions: The company has the right to redeem preference shares before maturity, at a specified price.
• Convertibility: Some preference shares are convertible into common shares, giving holders the option to participate in the company’s growth.

Types of Preference Shares:

• Senior Preference Shares: Have the highest claim on assets and dividends.
• Junior Preference Shares: Have a lower claim on assets and dividends than senior preference shares.
• Convertible Preference Shares: Can be converted into common shares at a specified price.
• Non-Convertible Preference Shares: Cannot be converted into common shares.
• Cumulative Preference Shares: Grant holders the right to receive a proportional amount of dividends, even if the company does not declare dividends.
• Participating Preference Shares: Grant holders the right to participate in the company’s stock split or other corporate actions.

Advantages:

• High dividend payments
• Lower risk
• Priority in asset distribution
• Limited voting rights can provide stability

Disadvantages:

• Limited growth potential
• Higher price
• May have higher redemption premiums
• Possibility of being redeemed early