Preferred shares (preferred stocks, preference shares) are a special type of shares of national or foreign companies, which, unlike ordinary shares, imply the payment of a fixed amount of dividends. In the financial arena, preferred shares also use the slang word “prefs”.
This is a very common type of securities that allows an investor to expect a specific return. In some special cases, the preferred shareholder can significantly influence the strategy of the company.
How do preferred shares differ from ordinary shares?
The advantage of preferred shares is the right:
- receive a fixed income or in the form of a percentage of the value of shares or a certain amount of money paid regardless of the performance of corporations. The owners of ordinary shares learn about dividend payments and their amount from time to time and this depends on the decision of the Board of Directors of the company.
- Priority receipt of dividends;
- for priority participation (after the satisfaction of creditors – banks of bondholders) in the distribution of the corporation’s property during its liquidation;
- for an additional payment if the amount of dividends paid for ordinary shares exceeds the amount of dividends for preference shares.
- to some advantages in relation to the conversion of their securities into ordinary shares, if necessary.
Holders of preferred shares often do not have the right to vote at shareholders’ meetings, but in some cases the holders of such shares can still vote.
What types of preferred shares are there?
There are the following types of preferred shares:
- cumulativewho have the right to accumulate unpaid dividends, accrue and pay them in the next period after the missed period;
- non-cumulativefor which the unpaid dividends are not added to the dividends of the following years;
- convertedwhich are exchanged for a specified number of ordinary shares or bonds of this corporation;
- unconvertedwho cannot change their status;
- with a share, which entitle the holders of these shares to receive additional dividends in excess of those provided, if the dividends for ordinary shares are greater.
Do preferred shares have disadvantages?
There are also disadvantages of owning preferred shares:
- The issuing company may demand such shares back from the shareholder without explaining the reasons, while fully compensating for the damage with interest;
- With rare exceptions, preferred shares do not give voting rights;
- They are less liquid than ordinary ones, because there are often significantly fewer prefs circulating in the markets;
- Preferred shares are not traded abroad and are not included in global indices.
Pref holders’ rights
Despite a number of important advantages of preferred shares in relation to ordinary and other securities of the company, some of their rights are still limited, for example, the right to vote. However, they can attend meetings, which allows them to defend their rights when questions concern their personal financial interests.
In addition, such investors are entitled to a proportionate share of the authorized capital of the firm. And also among the first to claim the property of the company during liquidation.
Where to buy preferred shares?
Most large companies are, in principle, interested in selling their assets to as many buyers as possible. And therefore now there are no problems in order, for example, to acquire privileged Gazprom shares or Sberbank from numerous brokers.
It is possible, as an option, to use the public resources of one of the exchanges on which the corresponding securities of large firms are traded in free circulation – for example, at the Moscow Exchange. For example, privileged Sberbank shares today they have a guaranteed profitability (about 4-5%) and a relatively low cost.
Which stocks should you choose: preferred or common?
Each time it depends on the specific situation. Prefs provide a more understandable dividend income, but they are less liquid, so it will be more difficult to make money on the difference in exchange rates. However, this may well be in the hands of investors in the long run.
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