Mertis & Demerits of Preference Shares

Merits of Preference Shares

The merits of the preference shares are as follow:




1)    Appeal to Cautious Investors: There are investors, who want safety of their capital.  They want fixed and regular return.  The preference shares may be sold to such investors.

2)    No Obligation: When the profits of the company are not sufficient, the company may not pay dividend on preference shares.  In case of cumulative preference shares, the dividend may be postponed.

3)    No Intervention: Preference shares have no voting rights.  Therefore, they are not able to intervene in the management of the company.

4)    Trading on Equity: As you know that rate of dividend on preference shares has been fixed. The benefits of trading on equity may be provided to the equity shareholders when the profits of the company are high.

5)    No Charge on Assets: As you know that preference shares do not create any mortgage or charge on the assets of the company. The fixed assets of the company may be utilised for raising the funds in future.

6)    Flexibility: The redeemable preference shares may be issued by the company for a fixed period.  When the capital is not required for the business, it can be repaid.  The capital structure becomes elastic.  The company does not face the problem of over-capitalisation.

 

Demerits of Preference Shares

The demerits of the preference shares are as follow:

1)    Fixed Obligation: The company is bound to pay the dividend on preference shares at a fixed rate.  This is paid before the payment of dividend on equity shares.

2)    Limited Appeal:  The risk taker investors may not invest in preference shares.  The investors who do not want to take risk may like to invest in debentures and government securities.  The company may provide high rate of dividend to attract the investors.

3)    Low Return: The fixed rate of dividend on preference shares may not be attractive, when the profits of the company are high.

4)    No Voting Rights: There are no voting rights to the preference shareholders. As a result, they can not intervene in the management of the company.

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