The advantages of redeemable preference shares are as follows-Issuing redeemable preferential shares provides the company with an option to choose between whether to repurchase shares or redeem shares depending on the market condition. Participating preferred shares or convertible they may be issued to attract bold and enterprising investors. That is a loss of $15,000 on your original investment of preferred stock at $50,000. They can be made more popular by giving special rights and privileges such as voting rights, right of conversion into equity shares, right of shares in profits and redemption at a premium. That would leave you with 5,000 shares of common stock at $7 per share, or $35,000. Meanwhile, the preferred stockholders plug along, still getting … Convertible preference shares hold an option – but not an obligation – which allows shareholders to convert their shares into a set number of ordinary shares, at a particular future date or within a specified period. It is also convertible into 100 shares of common stock after two years ($10 per share). However, if the earnings of a company increase, the company may choose to raise the dividends that it pays on common stock. The company redeems shares when it decides to pay back the shareholders. Common shareholders have no guarantee that they will receive dividends. Advantages and Disadvantages of Preference Shares Preference shares are hybrid financing instruments having several benefits and disadvantages of using them as a source of capital. It is a way of paying the shareholders similar to paying dividends. Convertible preference share means that the owner has the right to exchange a preference share for equity share of the same company. Each share of preferred can be exchanged for 50 shares of common, or 100 preferred shares x 50 common shares = 5,000 common shares. Advantages to Investors of Convertible Preferred Stock. Preferred shares are a hybrid form of equity that includes debt-like features such as a guaranteed dividend. Also, you wouldn't receive your preferred stock dividend anymore. For example, a Rs.100 preference share may be convertible into 10 equity shares of Rs.10 each. This can be a valuable benefit if the market value of the ordinary shares increases at a time when the preference shareholder can exercise their option. Preferred stock holders receive a fixed, guaranteed dividend payment. Benefits are in the form of an absence of a legal obligation to pay the dividend, improves borrowing capacity, saves dilution in control of existing shareholders and no charge on assets.
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