What are preference shares?
are a mixture of equity and debt. So they have some of the characteristics of shares and some of the characteristics of bonds.
Preference shares have many of the characteristics of ordinary shares. But you don’t get any voting rights with them. Yet their share price can climb and fall, just like ordinary shares.
They pay a ‘guaranteed’ percentage dividend. This means a company has to pay dividends to its preference shareholders before it can pay anything to its ordinary shareholders from its profits.
It’s this mix of equity and debt characteristics that gives preference a medium-risk characteristic. That’s why preference shareholders can expect to receive a higher level of income than debt holders as they take on more risk.
There are different types of preference shares available to invest in…
Five types of preference shares
If the company decides, it can convert this type of preference share into a normal share.
If the company can’t pay the dividends for this preference share in one financial year, if will pay out these unpaid dividends in future years when it’s in a financial position to do so.
If the company isn’t in a financial position to pay preference shareholders dividends in a particular financial year, the holder forfeits the right to this dividend.
In addition to the dividends preference shareholders receive, they’ll also receive ordinary share dividends.
The company can redeem or buy back these preference shares at some point in the future if it wants.
How to invest in preference shares
If you want to invest in preference shares, it’s exactly the same process as buying ordinary shares. You need to have an account with a stock broker.
On your instruction, a stock broker will buy preference shares for you. Currently there are just over 30 different preference shares listed on the Johannesburg Stock Exchange.
So there you have it. Why preference shares could be for you if you’re investing for income and are prepared to take on more risk.
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