How to Buy Preference Shares: A Beginner's Guide

Preference shares, often referred to as preferred stock, are a type of equity security that offers a fixed dividend payment to investors. This dividend is typically paid before any dividends are distributed to common shareholders. While preference shares don't usually have voting rights, they provide a more stable income stream compared to common shares.

Understanding Preference Shares

• Fixed Dividend: Preference shares offer a fixed dividend rate, which is usually expressed as a percentage of the share's par value. This provides a predictable income stream.
• Priority Over Common Shares: In case of liquidation or bankruptcy, preference shareholders have priority over common shareholders in receiving their investment back.
• Limited Voting Rights: Preference shareholders generally do not have voting rights in company matters.

How to Buy Preference Shares

1. Choose a Broker: Select a reputable brokerage firm that offers the ability to purchase preference shares. Ensure they have a good track record and offer competitive fees.
2. Research Preference Shares: Look for preference shares that align with your investment goals and risk tolerance. Consider factors such as the issuer's financial stability, dividend yield, and redemption terms.
3. Open an Account: If you haven't already, open a free demat account with your chosen firm. Provide the necessary documentation, including proof of identity and address.
4. Place an Order: Once your account is set up, you can place an order to buy preference shares. Specify the number of shares you want to purchase and the price you're willing to pay.
5. Fund Your Account: Ensure you have sufficient funds in your brokerage account to cover the cost of the shares, including any applicable fees.

Key Considerations When Buying Preference Shares

• Dividend Yield: Compare the dividend yield of different preference shares to find the one that offers the highest return on your investment.
• Callability: Some preference shares may be callable, meaning the issuer can redeem them at a predetermined price. This can limit your investment horizon.
• Convertibility: Convertible preference shares can be converted into common shares under certain conditions. This can offer potential upside if the company's stock price appreciates.
• Issuer's Financial Strength: Evaluate the financial health of the company issuing the preference shares. A strong issuer is less likely to default on dividend payments.

Remember: Investing in preference shares carries risks, including the possibility of default or changes in interest rates that could affect their value. It's essential to conduct thorough research and consider your financial goals before making any investment decisions.

Make sure you also know the difference between equity and preference shares before investing