Five types of preference shares you can invest in
Whiles ordinary shares are the most common type of stock, the other type of share you'll encounter in your investing activities is the preference share. Read on to find out about the different types of preference shares you can invest in…
A preference share is mix of equity and debt. “It has most of the same characteristics of an ordinary share, like bar voting rights, but carries a ‘guaranteed’ percentage dividend,” says Gareth Stokes in Fear, Greed and the Stock Market. This dividend has to be paid out of company profits before ordinary shareholders can receive dividends.
But did you know there are a number of different types of preference shares you can invest in?
Revealed: The five different types of preference shares
Cumulative preference shares. With these shares, if a company is “unable to pay preference share dividends in a particular financial year, the amount of these ‘unpaid’ dividends will be paid in subsequent years when results allow,” says Stokes.
Non-cumulative preference shares. With non-cumulative shares, should the company you invest in be unable to pay preference share dividends in a particular year, as the holder of these shares, you’ll forfeit the right to this dividend.
Redeemable preference shares. A redeemable preference share is issued with the provision that the company you invest in will be able to redeem this share at some future date. This means the company will be able to ‘buy’ these shares back and remove them from circulation.
Convertible preference shares. At the request of the company, a convertible preference share may be converted into an ordinary share. “An ordinary share is the most common class of share representing the shareholder’s proportional interest and ownership in a company,” says www.jse.co.za.
Participating preference shares. As the holder of a participating preference share, you’ll not only receive the fixed dividend entitlement, you’ll also receive the ordinary share dividend too.
There you have it. By understanding the different types of preference shares you can invest in, you’ll be able to pick the option that’s best for your investment needs.