A preference share is a term that every trader or investor in the stock market comes across. Just like equity shares, preference shares are the type of shares that are issued by the company. Sometimes, people confuse preference shares with equity shares and debentures. However, they all are different. In this article, we shall look at the basic concepts in relation to preference shares.
Firstly, let us understand the meaning of Preference shares.
Meaning of Preference Shares
Preference shares are those shares that have the preference over and above the equity shares of the company. The preference shareholders have the first right over the dividends and any surplus payment by the company. In addition, if the company goes into liquidation, the preference shareholders shall be the first one who will receive the money from the company for the debt.
Next important thing to know is who owns the preference shares.
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Who Owns Preference Shares ?
When an investor purchases the shares of the company, he does not become the preference shareholder of the company. Instead, such investor becomes an equity shareholder of the company. To further clarify, the preference shares of the company are only for the promoters or board of directors of the company. The financial institutions can also get a stake in preference shares of a company. These shares are not offered to the retail investors.
Let us now look at the features of preference shares.
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Features of Preference Shares
- Preference shareholders enjoy the priority over equity shareholders in terms of dividend payment.
- They do not have any voting rights at the annual general meetings of the company. However, preference shareholders are allowed to vote in special circumstances.
- The participating preference shareholders get first right not only in dividend payment but also in the additional income of the company.
- The preference shareholders have the first right on the assets of the company during liquidation.
- Preference shares can also be redeemed, depending upon its type. However, the terms of redemption may vary.
- The convertible preference shareholders have the right to convert their shares into equity shares of the same company.
Next, let us see the importance of preference shares to the investors
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Importance of Preference Shares to Investors
Preference shares are the first priority for those investors who do not want to take any risk. Preference shares not only give priority to the investors in terms of dividend payment but it also gives the shareholders the first right over the assets of the company during the process of liquidation. In addition, the redemption of the shares is another benefit. Hence, these are the reasons why big financial institutions are interested in purchasing the preference shares of the company.
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