Security: Top 6 Features of Preference Shares.

What is Security?

A security is a financial instrument or asset that represents a financial claim, ownership interest, or debt in an individual, company, government, or other organisation. Securities are bought and sold by investors in financial markets and may provide returns through interest, dividends, or an increase in value. 

Common examples of securities include ordinary shares, preference shares, bonds, debentures, and Treasury bonds. For example, when a person buys shares in a company, the shares represent part ownership of that company, while a bond represents money lent to the issuing government or organisation. 

Preference Shares

Preference shares are gradable assets in a company that give their holders certain preferential rights over ordinary shareholders, particularly in the payment of dividends and the repayment of capital when the company is wound up. 

Preference shareholders usually receive a fixed or predetermined dividend before ordinary shareholders are paid. However, they generally have limited voting rights compared with ordinary shareholders. They are therefore regarded as a form of share capital that combines some features of ordinary shares with the preferential claim to income and capital.

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Features of Preference Shares

1. Fixed or Predetermined Dividend:
Preference shares typically carry a fixed or predetermined rate of dividend. This means that the shareholder is entitled to receive a specified amount of dividend when the company declares dividends, according to the terms of the shares. For example, if a preference share has a 10% dividend rate and has a nominal value of ₦100, the holder may be entitled to ₦10 as annual dividend, subject to the terms of the issue.

2. Priority in Payment of Dividends:
Preference shareholders normally have priority over ordinary shareholders when dividends are being paid. This means that the company must first pay the dividend due to preference shareholders before distributing dividends to ordinary shareholders. 

However, this does not necessarily mean that preference shareholders will always receive a dividend, because payment depends on the terms of the shares and the company's circumstances.

3. Limited Voting Rights:
Preference shareholders generally have fewer voting rights than ordinary shareholders. In many cases, they don't participate in the ordinary management decisions of the company. However, the terms of the preference shares may give them voting rights in certain circumstances, such as when their dividends have been unpaid for a specified period or when decisions directly affect their rights.

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4. Priority in Repayment of Capital:
If a company is wound up, preference shareholders normally have priority over ordinary shareholders in receiving back their invested capital. However, they are mostly paid after the company's creditors and other liabilities have been settled. This gives preference shareholders greater protection than ordinary shareholders in the distribution of the company's remaining assets.

5. They Represent Ownership:
Preference shares represent part ownership of a company. A person who purchases preference shares becomes a shareholder rather than a creditor. However, the rights attached to preference shares are different from those attached to ordinary shares. Preference shareholders normally enjoy preferential rights concerning dividends and repayment of capital but may have limited participation in company management.

6. Lower Risk Than Ordinary Shares:
Preference shares are generally considered less risky than ordinary shares because preference shareholders have priority when dividends are paid and when capital is returned during liquidation. However, they are not risk-free. If the company performs poorly or becomes insolvent, preference shareholders may still lose some or all of their investment, depending on the company's assets and the terms of the shares.

Summary

• Represent ownership in a company.

• Usually provide a fixed or predetermined dividend.

• Preference shareholders receive dividends before ordinary shareholders.

• Typically, have limited voting rights.

• Have priority over ordinary shareholders when capital is returned during liquidation.