There are two kinds of offers - Equity and Preference each day, given deadlines, distractions, and workaholic crescendos.
But on Aristotle’s view, the lives of individual human beings are invariably linked together in a social context. In the Peri PoliV he speculated about the origins of the state, described and assessed the relative merits of various types of government, and listed the obligations of the individual citizen.
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Equity offers are actually what the name means - they are shares that are purchased and sold in the securities exchange.
Preference shares, then again, are somewhat more exceptional.
What separates them
To comprehend Preference shares, you should initially comprehend what dividends are.
When you purchase shares, you don't put resources into the securities exchange. You put resources into the value offers of an organization. That makes you an investor or part-proprietor in the organization.
Fortunately, since you possess some portion of the advantages of the organization, you are qualified for an offer in the benefits these benefits create.
On the off chance that you sell the offers for more cash than you picked them for, the benefit you make is called capital appreciation.
You could also make money with dividends.
Usually, a company distributes a part of the profit it earns as dividend.
Assume the capital of this company is divided into 10,000 shares. That would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend in this case would be Rs 500 per share. If you own 100 shares of the company, you will get a dividend cheque of Rs 50,000 (100 shares x Rs 500).
Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50%. It is important to remember this dividend is a percentage of the share's face value (the original value of each share). This means, if the face value of your share is Rs 10, a 50% dividend will mean a dividend of Rs 5 per share.
However, chances are you would not have paid Rs 10 (the face value) for the share.
Let's say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. This, in percentage terms, means you got just 5% as your dividend and not the 50% the company announced.
Or, let's say you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. In percentage terms, this means you got 55.55% as dividend yield and not the 50% the company announced.
What's great about preference shares
- you are guaranteed of dividend
If you own Equity shares, you are not automatically entitled to a dividend every year.The profit will be paid just if the organization makes a benefit and proclaims a profit.This isn't the situation with preference shares. An preference investor is qualified for a dividend each year.
- What occurs if the organization doesn't have the cash to pay dividends on preference partakes in a specific year?
The dividend is then added to the next year's dividend. If the company can't pay it the next year as well, the dividend keeps getting added until the company can pay.
These are known as cumulative preference shares.
Some preference shares are non-cumulative - if the organization can't pay the dividends for one specific year, the profit for that year slips.
- They get priority over equity shares
Equity shareholders get a dividend only after the cumulative preference shareholders get theirs.
Preference shareholders are given a preference over the rest. That's why it is called a preference share.
2.What's not good about preference shares
- 1. They are not easily available
Usually, preference shares are most commonly issued by companies to institutions. That means, it is out of the reach of the retail investor.
For example, banks and financial institutions may want to invest in a company but do not want to bother with the hassles of fluctuating share prices.
In that case, they would prefer to invest in a company's preference shares.
Companies, on the other hand, may need money but are unwilling to take a loan. So they will issue preference shares. The banks and financial institutions will buy the shares and the company gets the money it needs.
This will appear in the company's balance sheet as 'capital' and not as debt (which is what would have happened if they had taken a loan).
- 2. They are not traded on the stock exchange
of course, is the fact that they aren't traded on the markets.equity shares are traded in the markets and their prices go up and down depending on supply and demand for the stock.
But, that does not mean the investor is stuck with his shares. After a fixed period, a preference shareholder can sell his/ her preference shares back to the company.
You can't do that with equity shares. You will have to sell your shares to any other buyer in the stock market. You can only sell your shares back to the company if the company announces a buyback offer.
As you see, preference shares are not really stocks -- they have many features of bonds, such as assured returns.
In fact, they are like fixed income instruments -- their value remains the price at which the company issued them, while their dividends are fixed, just like interest payments.