Preferential Shares

The preferential shares are of another nature that began to extend in the twenties and thirties. It’s a hybrid form of investment in which you can appreciate the characteristics of the other two modalities: the investment in shares and the investment in liabilities.

As an investor, you should know with certain details the most important characteristics of the preferential shares. This type of shares also represents a participation in the share capital of the issuing company, but in a more limited grade.

The preferential shareholders don’t have any saying in the nomination of the directors and advisors of the company, but, on the other hand, they have a guaranteed payment of a fixed dividend that has priority over those shareholders of ordinary shares. Furthermore, in case of bankruptcy or liquidation, the demands of the preferential shareholders are also above in the distribution of the company’s assets. In that case, only the creditors would collect before the preferential shareholders. In spite of its apparent advantages (priority in collecting dividends an in the liquidation of the society), the preferential shares also have some negative aspects that you shouldn’t ignore.

The same as when ordinary shareholders have to wait for an increase of the dividends (motivated by the good economic results), a dividend in form of shares or also an spread of shares, doesn’t happen with the preferential shareholders, due that they, as a general rule, don’t enjoy of advantages that come from the growth and expansion of the society.

Because the investors in preferential securities look generally for current profits more than capital gains, they are particularly interested in the dividends paid. So any increase in the actual type of interest rate has a bigger impact on the preferential share prices. Than on those of the ordinary shares.

For the wise and cunning investor, the accumulative preferential shares and the convertible preferential shares give him the possibility of obtaining important profits. The owners of accumulative preferential shares enjoy of the advantage that when in those exercises in which it is impossible to pay dividends, these are accumulated and becomes into a debt of the company. To this respect, we have to emphasize that the dividends can’t be paid to the ordinary shareholders of the society while there is a minimum debt   of dividends with the owners of preferential shares.

The cunning investor that has a for sight of a sign of change in the business of the company will buy accumulative preferential shares with substantial dividends pending to be paid and in this way he will obtain an almost immediate profit when the company pay its debts to the preferential shareholders before paying the dividends of the ordinary shares.

The convertible preferential shares (preferential shares susceptible of being converted into ordinary shares) can also offer special opportunities to the investor with knowledge. An investor that has the for sight that it will pass some time before a society is acknowledged in the market as a “growing company”, will buy convertible preferential shares if such a company has shares in circulation. Buying this kind of shares, the investor not only insures itself of collecting a fixed dividend but also has the option (when the company is acknowledged in the market and its ordinary shares are revalued) of converting his preferential securities into ordinary.

Generally, the quotations of convertible preferential shares are more variable than those of mere preferential shares, because the quotation usually affects the ordinary shares in which they may be converted.

Which are the characteristics of the investor who buys preferential shares? The buyers of preferential securities are people who are cautious and that are interested in current profits.

The Federal Fiscal Laws permits that many anonymous societies and big investors to protect part of the dividends obtained from their security portfolios, which is another incentive for the investors to buy preferential shares.