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What are the features of Preference Shares?
As we know, there are generally two types of shares − general shares and preference shares. They also have certain differences and some similarities. While the preference shares have some distinct characteristics, it is easy to sort the differences between them.
The following features are available with preference shareholding.
Preference in Claims
Preference shareholders have the preference in claims on the assets of a company prior to equity shareholders. The equity shareholders are the owners of the company. Therefore, the preference shareholders have an upper hand while making a claim on the company's dividends and assets before the owners who are ready to forego the value of assets in case the company wounds up.
Dividends are Fixed
In the case of preference shares, the dividends are fixed. In the case of equity shares, there is no fixed payment of dividends. The accumulative shares can accumulate dividends in case of the lower performance of the company and return higher dividends when the condition improves. That is, the dividends are accumulated until the pay-off date in case of preference share. Dividends paid on preference and equity shares are non-tax-deductible.
Redemption is Easy
Redeemable bonds can be redeemed on maturity. They have the feature of redemption which is followed by dividend payout according to pre-fixed rate. Irredeemable shares are perpetual and do not pay any dividends. Equity shares usually have no fixed redemption date. Preference shares are lucrative options because of their redemption date as the shares could be redeemed as and when needed by the investors.
However, redeemable shares are limited in number, and only powerful corporate offer the options of redemptions without a final notice.
Convertibility of Preference Shares
Companies may offer convertible bonds where irredeemable bonds can be converted to redeemable ones. The idea is to gain from the popularity in the case of convertibility of preference shares. Conversion can be made according to given norms and after a pre-determined date. This helps the investors to have control over their investment portfolio as bonds can be converted for liquidity.
Calculation of Cash Flows
Calculation of cash flows of shares is easy like the calculation of cash flows of bonds. Cash flows may include annual preference dividend or redemption value on maturity. The final value of preference shares is equal to the sum of the present valuation of dividends plus the redemption value.
Note − There are distinct differences between general and preference shares. The most notable of them are claims and dividends. Conversions and Cash flows are also notable in the case of preference shares.
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