What are Preferential Shares
Preferential shares are different from ordinary shares in many ways. They are similar to fixed income (bond) instruments. The following are the characteristics of preferential shares.
• Not traded on stock exchanges
• Fixed rate of dividend per share
• Precedence in paying dividends
• Precedence in repayment
• No voting rights
• Bonus and face splits are not applicable
Let’s examine one by one.
Companies may issue preferential shares to raise money when they are not able to get loans. The investors or financial institutions who are interested to invest in the company but don’t want to take risk of price movements prefer preferential shares. Companies can issue preferential shares to any one whom they want to. Unlike ordinary shares preferential shares are not traded in the stock exchanges. So they are not liquid assets.
Preferential share holders receive fixed percentage of dividend per share every year. If the company doesn’t post profit for this year dividend will be paid out along with the next year’s dividend. The dividend can be carried forward each year until the company posts profits. This type of shares are called cumulative preferential shares.
Assume a company earned a profit and decided to distribute its earnings to normal share holders. First it has to pay the preferential share holders at the agreed rate and the remaining profit to normal share holders.
Earnings Per Share (EPS) of a company with preferential shares is
(Profit After Tax (PAT) – Dividend on preferential Shares) / Common Equity shares
In case of bankruptcy or liquidation preferential share holders will get their part before common stock holders.
Preferential share holders are not entitled to voting rights and they can’t avail the benefits of corporate actions like bonus, face splits etc.
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