Advantages and Disadvantages of Preference Shares

Here we are discuss advantages and disadvantages of preference shares on the points regarding the beginners. Any one who want to invest their capital in anything. Firstly, they have to study about it and importantly get to know about the advantages and disadvantages of shares. By reading out this post you may cleared about the Advantages and Disadvantages of Preference Shares.

You have to know about that for reading click below:-

What are preference shares and It’s types

Advantages and Disadvantages of Preference Shares

Advantages of Preference Shares on the following points:-

1. Appeal to cautious investors

Preference shares greatly appeal to those investors who look for reasonable safety of their capital along with a fixed but higher return than that obtainable on debentures.

2. No burden On Profits

Preference shares do not put a burden on finances as there is no legal compulsion to pay dividends.

3. No Interference in management

Generally , Preference shares do not carry voting rights. Therefore promoters can retain exclusive control  over the company by issuing preference shares to outsider.

4. No Charge on assets

Issue if preference shares does not involve any mortgage and or charge on the assets of the company . The company can Keep its assets free to be used for raising loans in future.

5. Trading on equity

Rate of dividend on preference shares is fixed. When the company’s earning rise, the company can pay higher rates of dividend to equity shareholders.

6.Flexibility

In case of redeemable preference shares, the amount can be repaid as and when the company does not need it. Participating or convertible preference shares can be issued to attract investors who want to share in the growing prosperity of the company.

Disadvantages of Preference shares on the following point:-

1. Limited appeal

Preference shares have no appeal for investors who want to take risk. More cautious and orthodox investors also don’t like to invest in preference shares due to uncertain and irregular return on these shares. In order to attract investors the company is forced to offer higher rates of dividend on preference shares.

2.Fixed liability

The Dividend on preference shares has to be paid at a fixed rate before it is paid on equity shares. In case the company’s earning are inadequate, very little might be left for equity shareholders. Such liability become all the more burdensome in the case of cumulative preference shares.

3. Lack of voting right

Preference shares do not carry voting rights in the normal course. When the company’s earning rise rapidly, holders of such shares do not get a share in the prosperity of the company except in case of participating shares.

4. Fear of being shown the door

Holders of redeemable preference shares have to face yet another displeasing outlook. The company raise capital from them when it is badly in need of funds. But once its purpose is set out, It’s proposition is goodbye to them by paying back their money.

Also Read:-
What is share and It’s types
What are preference shares and It’s types

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