If you are a participant of the stock market, you have probably met the concept of “preferred shares”. How they differ from ordinary shares and what privileges they give, let us consider in this article.

The concept of preferred shares
Preferred shares are securities that bring guaranteed dividend income to the owner. Also, in the case of liquidation of the company or the transfer of interest dividends, the holders of such shares have some advantages over the owners of ordinary shares.

The amount of income received from preferred shares depends on the dividend rate. It is determined on the basis of several factors: the issuer’s profit, dividend policy and the company’s goals. On the totality of all these indicators depends on how much income per share the investor will receive for the reporting period.
Types of preferred shares
There are two main types of preferred shares: cumulative and convertible. They are distinguished by the set of opportunities that the investor receives after their acquisition.
1
Cumulative
Their specificity consists in the fact that in case of insufficient profits, the shareholder can lose stable dividends. Such a decision is taken collegially by the shareholders’ meeting. But as soon as the issuer’s income reaches the expected level, the entire amount of payments will be returned to the holders of prefs.
2
Convertible
Holders of such shares get an opportunity to replace them with ordinary securities or prefs of another type. The term, proportionality and trading rate are determined in advance.
Advantages and disadvantages of prefs
Like other financial instruments, preferred shares have both advantages and disadvantages. Let’s consider them in detail.

Advantages of prefs
Fixed income. One of the most weighty ghosts of the holder is to receive stable dividend payments.
Low volatility. Changes and fluctuations in the stock market have less impact on preferred shares, so they are more stable and suitable for long-term financial investments.
Compensation of invested funds in preferred shares. In case of bankruptcy of the issuer, the owners of preferred securities are entitled to primary payments. They are made at the expense of the company’s assets.

Disadvantages of prefs
Risk of low profitability. Compared to ordinary shares, prefs of the same company can be characterized by higher dividends.
Lack of voting rights. Often holders of prefs cannot participate in voting at the shareholders’ meeting and influence decisions that affect the company’s activities.
The issuer’s right to return the shares. The company reserves the right to demand the return of preferred shares at any time. In this case the investor will be paid a financial loss.

What is the difference between common stock and preferred stock?

Companies on the stock market can issue both common and preferred shares. If you are thinking about which type of financial instrument to add to your portfolio, study their distinctive features.

Attribute	Ordinary shares	Preferred shares
Right to vote	Got it	No
Size of share in the authorized capital	Up to 100% of the authorized capital	Not more than 25% of the authorized capital
Nominal value	Same for all shares	Can be different depending on the types of shares
Dividend amount	Determined by resolution of the shareholders’ meeting	Defined by the Charter
Receipt of income on liquidation	Not guaranteed. Payable on a residual basis	Defined by the Charter. Payable on a priority basis

Dividends
The main difference between common and preferred shares is that pref holders can expect a fixed income. Usually it is a fixed percentage of the face value of the security. And shareholders who bought common shares receive dividends only if the company decides to do so based on earnings results.
Liquidity
This indicator is directly affected by the smaller volume of prefs in circulation and the number of investors willing to purchase them. Since common securities are often more attractive to buy, the liquidity of preferred shares is lower. At the same time, this helps prefs to be more stable in price.
Voting rights
Unlike holders of ordinary shares, pref holders do not have the right to vote at shareholder meetings. But there are exceptions. There are a number of decisions that investors can influence: they relate to the liquidation of the company, payments in bankruptcy, the timing and amount of dividends, and the issuance of prefs with extended privileges.
Issue volume
The number of both types of shares depends on the size of the company’s authorized capital. The issuer may issue ordinary securities up to 100% of the capital. While the limit on the number of prefs is 25%.
Compensation in case of company liquidation
When a company ceases to exist, holders of prefs may claim a part of the company in the first instance. Payments are distributed in accordance with the articles of association: the liquidation price of shares is prescribed therein. Other shareholders receive compensation on a residual basis.

Preference of preferred shareholders and their voting rights
The distinctive preference of preferred shareholders is the right to a stable income, which includes dividends. However, their holders also enjoy a number of other advantages:
the ability to exchange preferred shares for common shares;
priority payments of a portion of the share capital in case the company ceases to exist;
the right to participate in voting on the liquidation and reorganization of the company (provided that this is specified in the Articles of Association).

Which securities should I choose for my investment strategy?

Before making a stock purchase, you should determine your investment strategy. Whether you prefer long-term or short-term investments, how much risk you are willing to take, how well you know the basics of stock trading – the answers to all of these questions are important in forming a strategy that suits you.

When choosing between common and preferred stocks, the latter are more suitable for long-term investments. After all, they provide a stable and guaranteed income. The principle of their work is similar to bonds, but with the reservation that the value of prefs can change. Thus, there is a probability that their holder will receive both dividend payments and profit from the sale of the security.

Preferred shares are also suitable for those who are not going to participate in the life of the issuing company. And since the small number of shares in the portfolio does not allow the investor to vote at shareholders’ meetings, the prefs win the attractiveness of ordinary shares if dividends are stable.

 

 

If your investor’s strategy is reduced to speculative transactions and playing on the stock market, then ordinary shares will prevail in his portfolio. It should be noted that such a strategy requires risk tolerance, forecasting skills and knowledge of market principles.

 

Which companies have preferred shares?
In May 2022, out of 203 companies on the Moscow Exchange, 51 companies had preferred shares. The largest in terms of capitalization among them are: “Sberbank”, “Surgutneftegaz” and “Tatneft”. At the same time, their volume amounts to a maximum of 25% of the company’s capital, so there are always more ordinary securities in circulation.