Preferred stock is one of the most popular investment instruments in the financial world. However, there are still many investors who do not understand well what preference shares really are.
Preference shares have different characteristics from ordinary shares, so they require a deeper understanding before deciding to invest in them.
In this article, we will discuss in full the meaning of preferred stock, its types, characteristics, differences from ordinary shares, and provide some examples of preferred shares from leading companies. Read more, come on !
Read Also : What are Capital Gains? Definition, Types, and How to Count
What is Preferred Stock?
Preferred stock is a type of investment instrument issued by companies. Preference shares provide ownership rights to shareholders, but these rights have different characteristics from ordinary shares.
Preference shares get dividend or income payments earlier than common stock. This is because preferred stock has priority in dividend payments before common stock. Therefore, even if the company’s profits fall, preferred stockholders will still receive the promised dividend payments.
In addition, preferred shares also have voting rights, but not as powerful as common shares. Preferred stockholders have only limited voting rights in company decisions, such as elections of directors and major changes in corporate structure.
However, there are types of preferred shares that obtain greater voting rights than other types of preferred shares, such as participating preferred shares.
Read Also : What is Sharia Mutual Fund: Definition, Types, and Benefits
Types of Preferred Stock
Preferred stock is one of the investment instruments that is increasingly popular among investors. However, before investing in preferred stock, you must first understand the types of preferred stock that exist and the characteristics of each type.
Here are some types of preference shares that need to be understood.
1. Cumulative Preferred Stock
Cumulative preferred stock entitles shareholders to receive dividends that are not paid at a specified time.
That is, if the company does not pay dividends in a certain year, the dividend payments will be accumulated in the following year and must be paid first before dividends are distributed to common shareholders.
Cumulative preferred stock tends to be more stable and can provide a more consistent income than non-cumulative preferred stock.
2. Non-Cumulative Preferred Stock
Non-cumulative preferred stock, on the other hand, does not confer cumulative rights on shareholders. That is, if the company does not pay dividends in a certain year, preferred stockholders are not entitled to receive the unpaid dividends.
Non-cumulative preferred stock tends to be more speculative and can provide variable income.
3. Participating Preferred Stock
Participating preference shares provide preferred shareholders with greater voting rights.
In this type of shares, preferred shareholders are entitled to a higher dividend than ordinary shares, and if there is excess profit, preferred shareholders are also entitled to a larger share than ordinary shares.
Participating preference shares tend to be more complex and can provide greater returns but also carry higher risks.
4. Convertible Preferred Stock
Convertible preferred stock gives shareholders the right to convert preferred stock into common stock at a specified time.
Convertible preferred stock tends to be more flexible and can provide greater returns if the company is experiencing rapid growth.
Read Also : Money Market Mutual Funds: How They Work and Benefits
Characteristics of Preferred Stock
Before investing in preferred stock, it is important for investors to understand the characteristics of preferred stock. The following are some of the characteristics of preferred stock that investors need to understand.
1. Priority in Paying Dividends
The main characteristic of preferred stock is priority in paying dividends. Preferred stock has priority in dividend payments before common stock.
This means that if the company experiences financial difficulties, preferred stock will still receive the promised dividend payment, even if the dividend payment on common stock is abolished.
2. Limited Voting Rights
Preferred stock provides limited voting rights in company decisions, such as elections of directors and major changes in company structure. Voting rights on preferred stock tend to be fewer than ordinary shares, so they do not have a significant influence on company decisions.
3. Does not have voting rights
Some types of preferred stock do not have voting rights at all. In this case, preferred shareholders only have the right to pay dividends and do not influence company decisions.
4. Low Risk Level
Preferred stock tends to carry lower risk than common stock. This is due to priority in dividend payments and limited voting rights.
Preference shares also tend to be more stable than common stock, so they can provide investors with a more consistent income.
5. Most are in the form of bonds
Preferred stock often has characteristics similar to bonds. Preferred stock often has a fixed maturity date and interest rate, providing investors with a stable income.
Preference shares also tend to be more flexible than bonds, because they can be traded on the stock market.
Preferred stocks tend to have characteristics similar to bonds and can provide stable income for investors. By understanding the characteristics of preferred stock, hopefully you can make wiser and more effective investment decisions.
Read Also : What is Financial Freedom? Definition, Levels, and How to Achieve
Difference between Common Stock and Preferred Stock
Common stock and preferred stock are two types of shares issued by companies. Although both are investment instruments, there are significant differences between common stock and preferred stock.
The following are some of the differences between ordinary shares and preferred shares that you need to know.
1. Voting Rights
One of the main differences between common stock and preferred stock is voting rights. Common stock provides a greater say in company decisions, such as the election of directors and major changes in company structure. Meanwhile, preference shares provide limited voting rights in company decisions.
2. Right to Profits
Common stock and preferred stock have the same rights in terms of profit sharing. However, preferred stock has priority in dividend payments before common stock. Therefore, preference shares are preferred in terms of dividend distribution.
3. Priority in Paying Dividends
As previously mentioned, preferred stock has priority in dividend payments before common stock.
This means that if the company experiences financial difficulties, preferred stock will still receive the promised dividend payment, even if the dividend payment on common stock is abolished.
4. Risk Level
Common stock tends to be more speculative and carries a higher risk than preferred stock. Common stock also tends to be more sensitive to changes in market and economic conditions.
Preference shares tend to be more stable and have lower risk, because they have priority in paying dividends and limited voting rights.
5. Trading in the Stock Market
Common stock is traded more on the stock market than preferred stock. Common stock is also easier to buy and sell on the stock market.
So, it can be said that common stock and preferred stock have significant differences in terms of voting rights, profit rights, priority in dividend payments, level of risk, and trading in the stock market.
Preferred stock is more stable and carries lower risk than common stock. However, common shares provide greater voting rights and are more widely traded in the stock market.
Read Also : What are Blue Chip Stocks? Definition, Characteristics, and List
Example of Preferred Stock in the Indonesian Capital Market
You can find various types of preferred stock on the Indonesia Stock Exchange or IDX by looking at the stock code. Typically, preferred stock will add a P to the back of the company code to indicate that it is preferred stock.
Currently, there are several companies in Indonesia that issue preference shares which are quite attractive to investors. The following are two examples of large companies that issue preferred stock:
1. PT. Hanson International Tbk (MYRXP)
PT. Hanson International Tbk (MYRXP) is one of the companies that issue preferred stock in Indonesia. The company is engaged in real estate and property.
Preference shares issued by these companies provide the right to higher dividend payments than ordinary shares and have priority in dividend payments before common shares.
2. PT. Century Textile Industry Tbk (CNTX)
PT. Century Textile Industry Tbk (CNTX) is also one of the companies that issue preferred shares in Indonesia. This company operates in the textile and garment sector.
Preference shares issued by these companies provide the right to higher dividend payments than ordinary shares and have priority in dividend payments before common shares.
Thus the discussion about preferred stock that you need to know. In conclusion, preferred stock confers the right to dividend payments and has priority in dividend payments before common stock. Preference shares also tend to be more stable and have lower risk than common stock.
You may consider preferred stocks as part of your investment portfolio, especially if you are looking for a steady and stable income.