Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
In South Africa, preference shares are traded on the Johannesburg Stock Exchange (JSE). They are listed on the JSE in the same way ordinary shares are.
Preference shares are expensive source of finance as compared to debt. Since the risk is more in case of preference shares as compared to debentures, generally higher rate of dividend may have to be given compared to the rate of interest on debentures.
Who buys preferred stock?
Institutions are usually the most common purchasers of preferred stock. This is due to certain tax advantages that are available to them, but which are not available to individual investors. 3 Because these institutions buy in bulk, preferred issues are a relatively simple way to raise large amounts of capital.
Preference shares provide a fixed income from the dividends which is not guaranteed to ordinary shareholders. Hence, the risk is reduced significantly. Companies issue preference shares to raise funds without diluting voting rights. This is the trade-off to be made for getting an assured income.
Companies issue preferred stock as a way to obtain equity financing without sacrificing voting rights. This can also be a way to avoid a hostile takeover. A preference share is a crossover between bonds and common shares.
Advantages:
- Appeal to Cautious Investors: Preference shares can be easily sold to investors who prefer reasonable safety of their capital and want a regular and fixed return on it. …
- No Obligation for Dividends: …
- No Interference: …
- Trading on Equity: …
- No Charge on Assets: …
- Flexibility: …
- Variety:
As per Section 55 of the Companies Act, a company can issue redeemable preference shares. Irredeemable preference shares are not allowed to be issued. Hence public offer is not mandatory while granting preference shares to shareholders. No voting rights in case of preference shares differ from other shares.
Your startup can secure capital by issuing two different types of shares. You can give ordinary shares or preference shares to investors. … Typically, ordinary shares are the common type of share issued to founders and employees, while preference shares are issued shares to investors wanting to secure their return.