How to Buy Preference Shares(Preferred Stock) in India? | Types | Example | Zerodha

Preference Shares (Preferred Stock)

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Today’s article will discuss How to Buy Preference Shares(Preferred Stock) in India? Before that, we will understand what is it with features, benefits, examples, and types on the same.

Preference shares, also known as preference stock or preferred stock, are a type of equity investment that represents ownership in a corporation. In India, preference shares are considered as debt instruments and they offer fixed returns, They are not considered as equity shares, so the returns may not be as high as common stocks, but they tend to be more stable.

Preference shares have certain characteristics that distinguish them from common stock. They typically have a fixed dividend, which means that shareholders receive a set amount of money each year, regardless of the company’s financial performance. Additionally, preference shareholders have a priority claim on the company’s assets and earnings over common shareholders in the event of liquidation or bankruptcy.

Equity shares and preference shares are two different types of stocks that represent ownership in a corporation. The main differences between the two include:

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Equity and Preference Shares

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  1. Dividends: Equity shares typically do not have a fixed dividend, which means that shareholders receive a portion of the company's profits each year, based on the company's financial performance. On the other hand, preference shares typically have a fixed dividend, which means that shareholders receive a set amount of money each year, regardless of the company's financial performance.
  2. Priority: In the event of liquidation or bankruptcy, preference shareholders have a priority claim on the company's assets and earnings over common shareholders. This means that preference shareholders will be paid out before common shareholders in the event of a company's liquidation.
  3. Voting rights: Equity shareholders have voting rights in the company, which means they get to vote on important matters such as the selection of the board of directors and major corporate decisions. On the other hand, preference shareholders do not have voting rights, they only receive the dividends.
  4. Capital appreciation: Equity shares have the potential for capital appreciation, which means that their value can increase over time if the company performs well. On the other hand, preference shares do not have the potential for capital appreciation, they only offer fixed returns.
  5. Convertibility: Some equity shares are convertible into preference shares, but not all preference shares are convertible into equity shares.
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Types

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Here are some types of preference shares:

  1. Cumulative preference shares: These preference shares have a cumulative feature, which means that if the dividends on these shares are not paid in any year, the unpaid dividends accumulate and have to be paid out before any dividends are paid to common shareholders.
  2. Non-cumulative preference shares: These preference shares do not have the cumulative feature, which means that if the dividends on these shares are not paid in any year, they will not accumulate and will not be paid out in the future.
  3. Participating preference shares: These preference shares provide the right to participate in the profits of the company beyond a certain level, usually in addition to a fixed rate of dividend.
  4. Redeemable preference shares: These preference shares have a maturity date and can be redeemed by the company at a predetermined price on or after that date.
  5. Non-redeemable preference shares: These preference shares do not have a maturity date and cannot be redeemed by the company.
  6. Convertible preference shares: These preference shares can be converted into common shares at a predetermined conversion ratio and time.
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How to Identify the Preference Shares?

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In Zerodha, preference shares can be identified by the "PREF" prefix in the stock symbol.
For example, if the stock symbol for a preference share is "PREF-ABC", it would indicate that it is a preference share.
Additionally, you can check the stock's details on Zerodha's trading platform to confirm whether it is a preference share or not.

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How to Buy Preference Shares in India?

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A stockbroker is a licensed professional who buys and sells stocks on behalf of investors.
Retail investors can open a trading account with a stockbroker and fund it with the amount they wish to invest.
Once the account is funded, they can place a buy order for the preference shares they wish to purchase.
The stockbroker will then execute the order on the stock exchange and the shares will be credited to the investor's account.

Retail investors can also purchase preference shares through online trading platforms such as Zerodha, Upstox, and ICICI Direct, where they can open a trading account and fund it with the amount they wish to invest.
Once the account is funded, they can search for preference shares on the trading platform,
place a buy order and the shares will be credited to their account once the order is executed.

Buy Preference Shares in Zerodha

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To buy preference shares in Zerodha, you will need to have an account with Zerodha and have completed the necessary documentation and verification process. Once your account is set up, you can follow these steps to buy preference shares:

  1. Log in to your Zerodha account
  2. Go to the "Stocks" section of the platform
  3. Search for the preference share you want to buy using the stock symbol, which will have a "PREF" prefix
  4. Click on the preference share to view the stock's details
  5. Enter the quantity of shares you want to buy and the price you are willing to pay
  6. Review the details of your order, including the total cost and any applicable charges
  7. Submit the order to complete the purchase

Please note: buying preference shares in Zerodha or any other platform is subject to market conditions, stock availability and other factors. Always consult your financial advisor before making any investment decisions.

FAQs

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  1. What are preference shares?

    Preference shares, also known as preferred stock, are a type of equity security that provides a fixed dividend to shareholders before any dividends are paid to common shareholders. They also have a priority claim on the company's assets in the event of liquidation.

  2. What are the advantages of preference shares?

    Preference shares typically pay a higher dividend than common sharesThe dividend is fixed, providing a predictable income streamPreference shareholders have priority over common shareholders in the event of liquidationThey also have a higher claim on assets and earnings than common shareholders

  3. How preference shares are different from equity shares?

    Preference shares have a fixed dividend, while equity shares do notPreference shares have a priority claim on assets and earnings in the event of liquidation, while equity shares do notPreference shareholders do not have voting rights, while equity shareholders doPreference shares usually have a longer maturity period than equity shares

  4. Who can buy preference shares?

    Preference shares can be bought by any individual or institutional investor who meets the requirement of the company issuing the shares.

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