What Are Preference Shares?
Preference shares, often dubbed as the VIP section of the stock world, are quite the catch in company equity. Think of them as the first-class passengers of the corporate plane. While everyone else - the common stockholders - is squishing into the economy, preference shareholders are reclining with extra legroom. Essentially, they get paid dividends before any common stock dividends are handed out, and should the company go bust, these shareholders stand in line before common shareholders when it’s time to claim leftover assets.
Characteristics of Preference Shares
- Priority on Dividends: These shares offer dividends that are served first, hotter, and potentially juicier.
- Typically No Voting Rights: Holding preference shares might make you feel a bit like a monarchy without real power. You’ve got a financial stake but usually no say in the boardroom.
- Fixed Dividend Rate: Less gamble, more stable returns. The dividend is often set, which makes them resemble bonds.
- Types of Preference Shares: From cumulative (they remember if you missed a dividend!) and non-cumulative to convertible (swap it for common stock) and participating preference shares (think dividends plus bonus!).
Why Invest in Preference Shares?
If you’re risk-averse but love a good steady income from dividends, these might just be your financial soulmate. They’re like bonds but with a potential upside in earnings. Companies might call them back anytime. This means if they opt to redeem these shares, you might be asked to surrender your golden tickets, often in return for a premium price.
Related Terms
- Common Stock: Riskier but might give you a vote and bigger capital gains.
- Cumulative Preferred Stock: It’s like having dividential déjà vu, where missed dividends are paid later.
- Non-Cumulative Stock: What you see is what you get; missed dividends are gone forever.
- Convertible Preferred Stock: It’s Optimus Prime of stocks - transforms into common stock.
- Participating Preferred Stock: The cherry on top; additional dividends if the company hits its goals.
Books for Further Reading
- “Preferred Stock Investing” by Doug K. Le Du: Essential reads to cruise through the preferential lanes of investing.
- “Investing in Fixed Income Securities” by Gary Strumeyer: Understand the safety belts and airbags of fixed-income investments.
- “The Intelligent Investor” by Benjamin Graham: Insights into creating lasting investment value, including sections on preferred stock.
Getting familiar with preference shares might just be what separates the wheat from the chaff in your portfolio. After all, who doesn’t like being first in line and getting paid for it?
