What are preference shares?

What are preference shares or preferred stocks?

Preference or preferred shares are a type of stock issued to shareholders as priority recipients of dividends. The holders are also entitled to the distribution of assets before common stockholders, that is, if a payout is made at all.

For example, if the company goes into liquidation, the preferred shareholders are entitled to claim the remaining assets left before common stockholders receive their share.

Preferred shares are more attractive to investors than common stocks because they come in a form of a fixed-income security. Investors who own preferred stock are entitled to a consistent dividend payment at a scheduled date if the company grants them, similar to bond interest payments.

However, unlike bonds, preferred shares can be readily traded on an exchange, and they receive preferential tax treatment because certain dividends may be taxed at a lower rate compared to bond interest.

Types of preference shares

There are different types of preferred stocks that you can trade or invest in:

1. Cumulative preferred stock
2. Non-cumulative preferred stock
3. Participating preferred stock
4. Convertible preferred stock
   

Cumulative preferred stock

Cumulative preferred stock gives the holder the right to receive dividend payments first that may have been missed, or reduced, in the past.

If the company grants dividend payouts and they were either skipped or reduced at the scheduled time, when they resume, then cumulative preferred shareholders must receive all the dividends in arrears, before holders of common shares can receive payment.

Non-cumulative preferred stock

Non-cumulative preferred shareholders don’t have the right to claim dividends at a later stage if the company decides not to pay them on a scheduled date. With this type of preferred share, the company reserves the right to pay stockholders, and if they choose not to pay, the holders can’t claim them in the future.

Convertible preferred stock

Preferred stock enables the holder to convert their shares into a fixed number of common stocks. While not all companies will allow preferred shares to be converted, this practice enables the holder to take advantage of a degree of capital appreciation in the company in the long term.

Before converting the preferred stock, holders must check the conversion ratio to determine if its profitable to do so. Convertible preferred stockholders generally convert their shares if the common stock price trades above the conversion price.

Difference between preference shares and ordinary shares

Advantages and disadvantages of preferred stocks

Advantages of preferred stocks

• Preference shares have a much more stable price than common stocks as a result of fixed dividend payments
• Dividends paid to preferred shareholders are usually higher than those paid to common stockholders, that’s if they’re paid
• Preference shares can be converted into a set number of common stocks
• Since the preference share price doesn’t have a high potential to appreciate, it’s less volatile to changes in economic conditions

Disadvantages of preferred stocks

• Preference stockholders don’t have voting rights
• The potential for preferred shares to appreciate is low
• While holders may have the right to claim assets, they’ll receive their payment after bondholders have been paid

How to trade and invest in stocks with us

With us, you’ll get exposure to stocks using two ways: by either trading or investing. You can trade using spread bets or CFDs to go long or short without taking ownership of the underlying asset. Both derivative products enable you to get exposure using leverage, whereby you’ll only pay a fraction of the full position size to get exposure.

With leverage, both profit and loss will be magnified because it’ll be calculated based on the full size of the position, not just the deposit. So, you stand to gain or lose more money than your initial deposit.

Alternatively, you can invest in preference stocks using our share dealing account. When investing, you’ll need to pay the full value of the stocks upfront because share dealing is non-leveraged.

You may get back less than what you put in, because as much as the value of shares can rise, it can also fall as well. Shareholders will get voting rights as well as dividend payouts if the company grants them.

To get started, we’ve compiled a few steps that you’ll need to follow to trade and invest with us:

Preferred shares summed up

• Preference shares are a type of stock issued to shareholders as priority recipients of dividends
• There are four types of preference shares: cumulative, non-cumulative participating, and convertible preferred stock
• The difference between preference and ordinary shares is that preferred stocks have no voting rights, and they receive fixed dividend payouts while common stocks have voting rights plus varied payments, that’s if the company grants them
• Preference shares have advantages such as higher dividend payouts – and disadvantages, like no voting rights
• You can get exposure to preference stocks with us via spread bets and CFDs or invest to own the asset using a share dealing account