Advantages of preferred shares: overview of the peculiarities of dividend accrual
Preferred shares are financial instruments that have the characteristics of common securities and debentures. Their holders cannot participate in the management of the company and do not have the right to vote at meetings of asset holders. The main advantages of preferred stock, however, are that its holders are the first to receive dividends and, if the company is unable to pay them, they can vote. In addition, at important stages of the issuer, the holder of the securities also has the right to influence the future of the business, for example, in a merger or reorganization.
Prefs are designed to attract a large amount of funds to the company, they go to the formation of the authorized capital. Another reason to issue this type of securities is the desire to balance equity and external capital, without increasing the number of shareholders who could take part in the management of the business.
In the event that the company goes bankrupt or is liquidated, holders of preferred stock are the first to be compensated.
Prefs have types of value similar to those of common stock. They may be book value, par value, or market value.
Preferred securities are traded on the stock market and the easiest way to buy them is to use the services of a broker. Most often such shares cost less than usual ones, the reason for this is small liquidity. Besides, a number of difficulties may arise when selling prefs.
However, if we consider the acquisition of shares in terms of profitability, the preferred shares provide a higher level of this indicator than the ordinary ones.
The main advantage of prefs is dividends, which can be fixed or with a certain amount of extra payment. The yield, in turn, is expressed as a specific amount or as a percentage of the share’s actual value. There are cases when the amount of dividends is accrued taking into account the state shares. This is the case when the amount is paid once a quarter, and then it is adjusted for the volatility of government bonds. This option allows companies to reduce risks.
In addition, the amount of dividends is determined during the auction, which is periodically carried out by brokerage companies, which took part in organizing the listing. Those wishing to buy the shares submit applications, where in addition to the number of securities indicate the preferred amount of payments. Then all requests are processed and the average return of the shares is determined based on them. To take part in the auction, it is necessary to offer a dividend amount lower than that initially announced by the organizers.
Buying preferred shares, their holder can always be sure that even in difficult times, the company will make payments. If the business goes into liquidation, the owner of this type of securities has the right to claim a share of the business’s assets.
