The companies issue preference shares to increase stocks, which combine the characteristics of debt and equity investments. They are also subsequently considered to be hybrid securities. Preference shares come with its own share of merits and demerits. On a positive note, they gather dividend payments before common stock shareholders receive such income, whereas, they do not enjoy the voting rights that common investors generally do.
Preference shareholders receive fixed dividends, much before common shareholders receive any profit. Dividends are only paid if the company sees any money in both cases. But there is a setback to this approach because a type of preference shares known as cumulative shares allows for the generation of unpaid dividends that must be paid out after some time. Therefore, once a struggling business finally bounces back, those unpaid dividends are allotted to preferred shareholders before any dividends can be paid to common investors.
Higher Claim On Company Stocks :
If a company experiences a bankruptcy and subsequent liquidation, preferred shareholders have the upper hand on company stocks than common shareholders do. Not surprisingly, preference shares attract conservative investors, who enjoy the comfort of the downside risk security baked into these investments.
Added Shareholder Perks :
Convertible shares, which is known as a subcategory of preference shares, let investors trade in these types of preference shares for a fixed number of common shares, which can be profitable if the value of common shares increases. Such participating shares benefit the investors with additional dividends that are above the fixed rate provided the company meets certain fixed profit goals.
The main disadvantage of being a preference shareholder is that the shareholders in these vehicles don’t enjoy the same voting rights as common investors. This means that the company is not obliged to preferred shareholders the way it is to traditional equity shareholders. Although the guaranteed return on investment makes up for this setback, if the interest rate increases, the fixed dividend that was once seen as profitable can diminish.