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Preference shares |
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Preference shares is a type of share. It is different from a common stock. Preference share is also known as preferred shares or preferred stocks. The terms which are associated with preference shares are negotiated between the investor and the corporation. It gives the share holder an edge over common share holders. The stockholders who posses preference stocks gets special treatment when annual dividends are distributed among the share holders. Those who buy preference stocks are not benefited from the company's profit. The value of the stock is fixed. The people who own preference stocks get dividend once a year. It is their benefit.
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Preference shares are paid dividend before it is paid to any common stock holder. It can either carry a superior voting right or it may not carry any right at all.
This type of share is common in private organizations. This type of share helps to create a division between the economic interest in the company and control of the company. In majority of the countries the banks are promoted and encouraged to issue preference shares. However, Tel Aviv Stock Exchange do not allow the listed companies to issue preference stocks.
Rights attached to preference shares:
Before declaring dividend for a common share, dividend has to be declared in a preference share and the preferred shares has to be satisfied. Sometimes the dividend rights are cumulative in nature. It means that even if the dividend is not paid to the investors, it gets accumulated every year. Preference shares do not have a rigid liquidation value. The liquidation value means the amount of money which is paid to the company when the share was initially issued. Another important right that is provided to preference share is that they have the power to approve certain events of the company or sometimes given opportunity to elect directors.
Types of Preference share:
Several types of preference share is available. A company can issue innumerable types of preferred stocks. Some of the preference shares are Cumulative Preferred Stock, Puttable Preferred Stock, Participating Preferred Stock, Non-cumulative Preferred Stock, Exchangeable Preferred Stock, Perpetual Preferred Stock, Convertible Preferred Stock.
A cumulative preferred stock is referred to such a stock in which dividend is not declared regularly but is accumulated for the future. On the other hand, a non-cumulative preferred stock is such a stock where the dividend is not accumulated for the future. A Puttable Preferred Stock is such a share where the share holder is forced to redeem the shares under certain specific conditions. A Participating Preferred Stock is such a share which has the possibility of getting additional dividend in certain situations. An Exchangeable Preferred Stock is a type of stock which has the option of getting exchanged to a different security. There are some specific terms and conditions attached to it. A Perpetual Preferred Stock is such a stock which do not have a specified redemption date.
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