The preferred share is a share that confers on its holder an extra privilege, generally of an economic nature, with respect to what we commonly know as an ordinary share.
For example, the holder of a preferred share has a higher hierarchy in the collection of dividends or in the distribution of the remaining equity in the event of bankruptcy by the company.
As with ordinary shareholders, preferred shares do not expire, but nevertheless, unlike ordinary shares, preferred shares do not legitimize their holder the right to vote at ordinary or extraordinary shareholders’ meetings, nor do they assign some participation in the capital of the company. Likewise, the profitability of the preferred shares is not guaranteed either, since it is linked to the obtaining of profits.
Preferred shares are complex instruments where the dividends to which you are entitled are predetermined. Normally, these dividends are conditional on obtaining positive results. Depending on the type of contract, the dividend may be cumulative in the event of obtaining losses during the year.
Advantage of preferred shares
One of the advantages of these actions is that in case of liquidation of the company the holders of preferred shares have priority over others. That is, if the company disappears, the money is first returned to the preferred shareholders and then to the ordinary shareholders. However, creditors will always go before shareholders (shareholders are the last to collect). The liquidation value of the shares may be predetermined or conditioned to the value of the ordinary shares.
Disadvantage of preferred shares
The disadvantage of this instrument is that it does not have an organized secondary market (they are not listed on the stock exchange) where it can be sold, so its liquidity is quite limited. They also do not have the right to vote in company meetings.
Types of preferred shares
Generally, the preferred shares most issued by companies are the following:
- Redeemable shares : Are those that have a purchase option by the issuer with conditions previously agreed with the investor. In other words, it gives the company the option to buy back the preferred shares from investors at a specified price and for a specified period.
- Convertible shares : These are those that can be converted into a specified number of ordinary shares.
- Cumulative preferred shares: If the dividend is not paid, it is accumulated for future payments.
- Redeemable cumulative preferred share : That which gives its holder preference in the payment of dividends with respect to ordinary shareholders
- Preferred share with multiple vote :
- Non-cumulative shares: The dividend does not accumulate if it is not paid. This type of preferred stock is the most common issued among banks.
- Convertible preferred shares: They have the option of converting into a share at a pre-established price.
- Exchangeable preferred shares: You have the option of being exchanged for another share with another type of security under certain conditions.
- Monthly income preferred shares : It is a hybrid between a preferred share and a subordinated debt.
- Participating preferred shares: Allows the possibility of additional dividends under certain conditions.
- Perpetual preferred shares: They do not have a return date of the invested capital.
Preferred shares in different countries
It is important to mention that in some countries the issuance of this type of shares is encouraged, since they are considered high quality assets. There are different classes of preferred shares, class A, B, C, convertible, monthly income, perpetual, non-accumulative, etc. The most important are the ones we have named above.
In the United States, for example, there are two types of preferred stock: preferred and convertible preferred. In addition, there are tax advantages in the income tax for the possession of these.