Preferred shares and their classification

Shares distinguish between simple and privileged. Preferred shares grant their holder additional rights, but they also have certain limitations.

Among the main differences of these securities from the standard ones is that they allow receiving fixed dividends, due to which the investor has a stable income and does not depend on the state of affairs in the stock market.

As a rule, the amount of dividends on them is higher, which allows you to earn much more.

Preferred shares give the priority right to receive a part of the property, if the company is completely liquidated. However, holders of ordinary shares have the right to vote at a meeting of shareholders convened to resolve strategic issues (as decided by the company). And the owners of preference shares have no such opportunity. However, if a company incurs losses and can not pay dividends, the holders of these securities receive this right. This is quite logical, because thus the owners of preferred shares have the opportunity to rectify the situation with the help of operational management of the company. In other words, the owners of this type of securities can not influence the decisions that the company takes. They remain just investors, while owners of ordinary shares are co-owners of business.

Thus, preferred shares provide their owner with the following rights:

1. Priority receipt of dividends.

2. Obtaining a share of the property when the company is liquidated.

3. Voting, which is held due to non-payment of dividends or other cases regulated by law.

That is, the advantage of such securities is that they will necessarily make profit accrual, which is a few percent of the total asset value (approximately 3 to 5). As a rule, its size is determined at the relevant meeting and recorded in the documentation.

In the event that the company works and steadily receives profit, which allows it to regularly pay dividends, preferred shares become bonds with variable coupons that have indefinite terms and the body of repayment.

Proceeding from the foregoing, the question naturally arises whether to invest in this type of securities. A positive response can be unambiguous only for long-term investments if the shares belong to a reliable and stable company with a good reputation in the market.

We note that ordinary and preferred shares, due to differences in operating conditions, allow flexible control over the votes of the public. As a rule, simple papers are not in the hands of shareholders, because the charters of most companies provide for a certain balance between those and other shares that are in the same hands.

Preferred shares are divided into convertible and cumulative. The first type of securities can be exchanged for any other type (for example, simple or cumulative). When an investor acquires this type of shares, he protects himself from not being too successful a company. He, at the same time, gets the opportunity to exchange them for ordinary. The result of this action automatically becomes an increase in the profit.

Cumulative preferred shares give an opportunity to accumulate dividends if their payment is not made. The issuer regulates the period for which they can accumulate. If their payment does not occur after the expiration of this period, the investor will receive the right to vote at meetings until such time as he receives the dividends he is entitled to receive.