A privileged share is a share that gives the shareholder a privilege, either economic or political, over ordinary shares.
Privileged stocks have characteristics that they share with both common stocks and bonds. They are similar to the ordinary ones in that they give the right to collect benefits distributed by the company. In addition, they grant pre-emptive subscription rights and do not have an expiration date. In the case of bonds, they are similar because the dividend is usually a fixed percentage, as if it were the coupon of a bond.
Characteristics of privileged shares
There are other types of characteristics of privileged shares that give them a differential element in relation to other types of shares:
- Cumulative dividend: Most of these stocks have a cumulative dividend clause. This means that all dividends unpaid in the past must be paid before distributing profits to common shares.
- Safeguard clause: It involves granting voting rights to privileged shares in the event of non-payment of dividends. It also implies the restriction of the payment of dividends to ordinary shareholders, if the company is in financial difficulties.
Types of privileged shares
The privileged shares can be differentiated in turn two types: convertible or redeemable.
- Convertible shares: These are those that can be converted into a specified number of ordinary shares.
This logically benefits the investor, because it gives him the possibility of becoming an ordinary shareholder. In this case, you would obtain voting rights and a greater potential for return on investment. The greater potential for profitability is conditioned by the fact that ordinary shares have greater risk than privileged shares. On the other hand, it makes it easier for the issuer to reduce the cost of preferred shares.
- Redeemable shares: Are those that have a purchase option by the issuer with conditions previously agreed with the investor. In other words, it gives the company the option to buy back the preferred shares from investors at a specified price and for a specified period.
Differences between privileged and ordinary shares
The privileged share has a series of characteristics that differentiates it from other types of shares. And, above all, it helps us to see the difference with ordinary shares:
- Priority in the collection of dividends: When there is a distribution of profits by the company to the shareholders, the privileged shares have priority over the ordinary ones. That is, the company will pay dividends to the privileged before the ordinary.
- Priority in bankruptcy: In the event of bankruptcy, preferred shares have priority for claiming company assets over ordinary ones.
- Lower risk: Preferred shares have lower risk than ordinary shares. This is because they collect dividends and recover assets in bankruptcy earlier than ordinary ones.
- Voting rights: Normally, privileged shares do not have voting rights, unlike ordinary shares.
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