Different types of Preferential Shares

We can classify preferential shares as

Cumulative preferential shares — Non - Cumulative preferential shares
Redeemable preferential shares – Irredeemable preferential shares
Convertible preferential shares – non-convertible preferential shares

Cumulative preferential shares: If a company doesn’t earn profits this year the dividend that is due on these shares are carried forward to the next year. If it won’t make profits next year dividend for both the years will be carried further. This continues until the company posts profits and pays the dividends.

Non - Cumulative preferential shares: If a company doesn’t earn profits this year the dividend that is due for this year will be lapsed.

Redeemable preferential shares: You can sell back the shares to the company after a period of time.

Irredeemable preferential shares: They are not redeemable but the holders continue to get dividends as long as the business of the company is in progress.

Convertible preferred shares: After a specified time you can convert your preferred shares into common stock at a ratio defined in the agreement.

Non - Convertible preferred shares: These preferred shares can’t be converted into common stock.

Usually preferred shares have more than one feature. The valuation for buying preferred shares depend on the rate of expected return and the above said features.

The simple formula is (Dividend per share) / (Expected Return)
One needs to keep inflation in mind while choosing expected rate of return

For example if the dividend per share per annum is Rs 10 and you are expecting 15% rate of return.

Then the valuation = 10/0.15 = Rs 66.67