Preferred Shares and Preference Dividends

1. Preferred Shares/Dividends, Options & Warrants

2. Preferred Shares and Preference Dividends
• A Company issues two types shares – Common Shares and Preferred
Shares.
• Common share represents ownership in a Company. Holders of Common
share may or may not be entitled to dividend, depending upon the
profitability of the Company.
• Preference share entitles its holders to a fixed dividend irrespective of
the profitability of the Company. Dividends received on the preferred
stock are known as preferred dividend.

3. If Mr. X bought equity share of XYZ Inc. at a market price of $50 in 2005,
and sold those share in the market in 2015 at prevailing market price of
$100, after receiving annual dividend of $5 every year for 10 years.
• Total return received by Mr.. X will comprise of the same two
components – Dividends and Capital appreciation.
• Total dividend received by Mr. X. = $50 ($5 * 10)
• Capital appreciation = $50($100 – $50) (Sold value of investments –Initial
value of investments)
Returns through Dividends & Capital Appreciation

5. #1 – Higher dividend rates
#2 – Fixed percentage
#3 – Legal obligations
#4 – Preferred treatment
Common Features of Preferred Shares

6. • Preferred dividend rates are much higher than the rates of equity or
common stock.
• The reason for this is because preference shareholders do not have
ownership control over the company, hence to attract the investors,
higher rates of dividends are offered to them.
#1 – Preferred Treatment

7. • Unlike the dividend on common or equity stock which keeps on fluctuating every
year depending on the profitability of the company, preferred dividends do not
fluctuate, their rate remains unchanged throughout the maturity life of
preference share.
There is also one other major reason for fluctuation of dividend on common
stock.
• Dividend rates on common shares are recommended by the shareholders during
the annual general meeting of the company.
• Hence it keeps on fluctuating since the shareholders decide rates keeping in mind
the profitability and future outlook of the Company.
#2 – Preferred Treatment

8. • Preferred dividends, like interest on debts, create legal obligation on
the company. These are to be paid to shareholders in preference over
any common stock dividend.
• The liability on the company to pay preferred dividends is
unconditional and absolute.
• Various jurisdictions impose penalties in case company does not pay
outstanding preferred dividend.
• These penalties ranges from fine and imprisonment of directors to
prohibition on the company to raise additional finances from the
public, till the liabilities are paid out.
#3 – Preferred Treatment

9. • Preferred dividend are paid out to shareholders in precedence over
other types of dividends i.e. dividends are paid out to shareholders
before common stock or equity dividends are issued.
• In case of liquidation of company, the shareholders with preferred shares
are entitled to be paid from company assets first.
• All this feature of the preferred dividend gives it the preferential
treatment with respect to other types of dividends.
• In the corporate world, there are various types of preference shares.
These may or may not have some of the above mentioned features and
may also contain some additional unique features.
#4 – Preferred Treatment

10. • Cumulative Preferred Shares
• Non-Cumulative Preferred Shares
• Convertible Preferred Shares
• Non- Convertible Preferred Shares
• Redeemable Preferred Shares
• Irredeemable Preferred Shares
• Participating Preferred Shares.
• Non-Participating Preferred Shares.
• Perpetual Preferred Shares
• Prior Preferred Shares
Types of Preferred Shares

11. • Cumulative stock or shares where undeclared dividends permitted
to accumulate still they are paid which means it has a right to a
particular amounts of dividend every year. If the dividend are not
able paid or declared, the stock can accumulate the dividends
unpaid for a future period in which they are declared.
Cumulative Preferred Shares

13. • Where as in case of non-cumulative stock, if the dividend are not
available to declared in current period than the preferred stock face
the situation to lose any kind of dividend. The non-cumulative stock
do not accumulate any kind of unpaid dividend. It does not utilize
the dividend in arrears account for unpaid dividends.
Non-Cumulative Preferred Shares

15. • In case of convertible stock, the convertible character provides a
company to transfigure their preferred stock into a pre-decided
numbers of shares of common stock of the organization or
company at some point in future. The conversion features or
characteristics is at first set a transmutation rate that is not
fascinating in the eyes of investors at the time of purchase or buy.
However, if the cost of the ordinary stock hike, then the investors
can transform to ordinary stock, and may then the stock will
dispose to realize an instant profit.
Convertible Preferred Shares

17. • In case of non-convertible stock the holders of non-convertible
preferred stock have no such right of conversion.
Non- Convertible Preferred Shares

18. • Redeemable stock can be redeemed on or after a period fixed for
redemption under the terms and conditions of issue or after giving a
proper notice for the redemption to preference stockholders. The
companies act, however, imposes certain restriction for the
redemption of preference stock.
Redeemable Preferred Shares

19. • Non-redeemable stock are those types of stock or shares which
cannot be redeemed during the lifetime or period of the company.
Non-redeemable Preferred Shares

20. • The holders of participating preferred stock have a right to
participate in the surplus or additional profits of the company
remained after paying dividend to the ordinary shareholders and
preference shareholders at a fixed rate.
Participating Preferred Shares

22. • Whereas in case of non-participating stock, the preference stock do
not have such right to participate in surplus or additional profits.
Non-Participating Preferred Shares

23. • These type of preferred shares do not have any maturity period. In
case of perpetual preferred shares, initial invested capital is never
returned to the shareholders. Shareholders continue to receive
preferred dividend for infinite period. Most of preferred shares falls
into this category.
Perpetual Preferred Shares

24. • Company generally issues more than one type of preference shares
i.e. they may issue convertible, non-convertible, participating and
etc. Any preferred share which is designated as prior preferred
stock by the company will have prior claim on dividends over other
types of preference stock. Therefore, it can be said that prior
preferred have less credit risk than other preferred stocks.
Prior Preferred Shares

25. • A stock option is a contract between two people that gives the holder the right, but not the obligation, to buy or sell
outstanding stocks at a specific price and at a specific date. Options are purchased when it is believed that the price of
a stock will go up or down (depending on the option type). For example, if a stock currently trades at $40 and you
believe the price will rise to $50 next month, you would buy a call option today so that next month you can buy the
stock for $40, sell it for $50, and make a profit of $10. Stock options trade on a securities exchange, just like stocks.
• A stock warrant is just like a stock option because it gives you the right to purchase a company's stock at a specific
price and at a specific date. However, a stock warrant differs from an option in two key ways:
1. A stock warrant is issued by the company itself.
2. New shares are issued by the company for the transaction. Unlike a stock option, a stock warrant is issued directly
by the company. When a stock option is exercised, the shares usually are received or given by one investor to
another; when a stock warrant is exercised, the shares that fulfill the obligation are not received from another
investor, but directly from the company.
• Companies issue stock warrants to raise money. When stock options are bought and sold, the company that owns the
stocks does not receive any money from the transactions. However, a stock warrant is a way for a company to raise
money through equity (stocks). A stock warrant is a smart way to own shares of a company because a warrant usually
is offered at a price lower than that of a stock option. The longest term for an option is two to three years, while a
stock warrant can last for up to 15 years. So, in many cases, a stock warrant can prove to be a better investment than a
stock option if mid- to long term investment are what you seek.
Options/Warrants