In the United Kingdom, Preference shares are traded investments on the stock market that are similar to ordinary shares but the nature of the investments is slightly different. Many financial institutions have raised cash from selling preference shares to financial institutions and the listings of these preference shares are bought and sold on the London stock market. The preference shares vary in terms of there classification. Some issues are cumulative whereby the profits or fixed coupon rate can be paid to preference share holders even when the company has not made enough profits during a certain time period. The preference share holders can often be paid in extra shares as the investment goes ex dividend.
Other types of preference share class, are non cumulative whereby if the company can not pay the coupon rate, the expected fixed payment will not be paid, until the time where a company can afford to pay the share holders the dividend on non cumulative issues.
Irredeemable preference shares means that the company is unlikely to repay its preference share holders the face value which is 100pence per share. This means that the coupon rate will most likely be paid, but the shares will not be redeemed by the company. Redeemable issues works slightly different in that the company has the option to redeem the preference share holders.
Preference shares go ex dividend twice yearly and investors of these preference shares are paid in cash through their stock broker depending on the number of shares held. From my own experience there is no tax charged against preference share interest as I am a lower income tax payer. The preference share dividend interest is paid gross of tax. The preference shares are suitable for investors to receive a fixed rate of return each year and the investments are also eligible for inclusion into tax free savings products such as an Individual savings account. Another advantage of preference shares are that the rate of return achieved is higher in the long term than on savings products that are available from banks.
The disadvantages of the preference shares make interesting reading in that whilst the low interest rate scenario at present is good for preference share holders, when the Fed rate and UK base rates start rising, the value of the preference shares will fall slightly as investors will be able to achieve a rate of return with cash investments in banks. Cash investments in banks long term has never been anything exciting but the banks might raise savings accounts returns to savers when interest rates are high. Also the company may go bust which will wipe out the capital invested so like ordinary shares this carries risk.
Preference share holders can not normally attend or vote at annual general meetings. The good thing about the preference shares is that they rank in preference to ordinary share holders, but if the company goes bust then even the preference shareholders are unlikely to receive their money back. So caution in investing is needed.
At present I hold investments in a few financial institutions and have reached a good rate of return as the coupon rates are fixed for each particular preference share investment. I have found good coupon rates for certain insurance and bank investments that yield around 7%. The coupon rates I have achieved for example is 8.75%, 9%. There are more risky preference shares such as Lloyds banking, ticker LLPC and LLPD, where their coupon rates are 9.25% and 9.75% although these are currently blocked for coupon payments until May 2012 due to an EU ruling as Lloyds received state bail out money.
In conclusion I find that a preference share holding to be a very constructive and interesting form of investment and it is good that preference shares are in theory paid twice yearly and can be bought or sold at any time. The disadvantages of the preference shares are that the bid and ask spread make these more suited to long term investors. People can not buy preference shares and make good returns over a month or two, because the coupon rate is split into twice yearly payments. Also the preference shares in general do reflect some of the risk that can be found in ordinary shares of the parent group, but the preference shares generally are not as volatile during trading over a period of time.