Jun 25, 2019

Preferred stock

Preferred Shares

Issuing preferred share is deemed a method for long-term financing. A preferred share is kind of security whose holder is entitled to a restricted and defined claim in respect of a company’s earnings and assets and he/she may enjoy a fixed profit. Such a share is issued when the cost of ordinary share is higher. It is called preferred due to two reasons:

1) The profit of such share is paid prior to that of an ordinary share

2)  Upon dissolution of the company or sales of assets, after settlement of the company’s liabilities, at first preferred shareholders receive their rights and then, the remainder of assets is accrued to the ordinary shareholders.

Features

Other features of preferred shares are as follows:

1) Preferred shares entitle their owners to a kind of ownership in the company

2) Preferred shares are similar to ordinary shares in respect of lack of maturity, as well as tax cost; nevertheless, with regard to paying fixed profit, they may be classified in the group of securities with fixed income, just like bonds. Of course, payment of profit entails earning of profit by the company.

3) The issuing company is not obliged to mortgage or pledge its assets in respect of such shares, because preferred shareholders enjoy proprietary right.

4)  Preferred shareholders has priority over ordinary shareholders in respect of receiving dividend

5) Preferred shares usually do not carry voting right, i.e., holders of such shares are not entitled to cast their votes upon election of board members and/or other affairs relating to administration of the company and they cannot get involved in the decisions made at the company.