Saturday, 29 April 2017

Convertible Preference Shares or Preferred Stock

Preference shares can be classified into the following categories:
  • Cumulative
  • Non-cumulative
  • Participating 
  • Non-participating
  • Convertible

Convertible Preference Shares

These are convertible into a specified number of common shares based on a conversion ratio that is determined at issuance.

They have the following advantages:
  • They allow investors to earn a higher dividend than if they had invested in the company's common shares.
  • They offer investors the opportunity to share the profits of the company.
  • They allow investors to benefit from a rise in the price of common shares through the conversion option.
  • Their price is less volatile than the underlying common shares because their dividend payments are known and more stable.

Convertible preference shares are becoming increasingly common in venture capital and private equity transactions.

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