Shares are a type of securities. All information. Types of preferred shares The decision to issue cumulative preferred shares

20.10.2023

Cumulative shares are ordinary securities that are issued to shareholders in lieu of dividends. The very concept of “cumulative” has a cumulative nature in relation to the object with which it is used.

Let's consider what cumulative shares mean in stock trading, their distinctive features and varieties. First of all, it should be noted that they are privileged and ordinary.

Ordinary cumulative securities

Regular securities usually give voting rights to the shareholder at the relevant meeting of the company, however, this is not a guarantee that the shareholder will receive dividends. In other words, receiving dividends is possible only if a decision is made at a meeting of shareholders to allocate partial profits of the joint-stock company for their payment, and also if, after paying off priority obligations, which include payments on preferred securities, the enterprise will have funds left.

An ordinary cumulative share is a security for which payment is not made in cash, and the same ordinary shares enterprises. In simple words, owner securities replenishes equity by increasing their number in the investment portfolio.

Home distinctive feature In the case of ordinary cumulative securities, it is considered that the above payment, made in the form of shares and not in cash, is not subject to income tax deduction.

Preferred cumulative securities

Preferred shares are not cumulative in the following case - if payments on them are made in priority order. This happens if the joint stock company received such a profit for the current period that it is not possible to pay dividends to all owners of the securities. As a result, only shareholders owning preferred securities remain priority. If the company suddenly goes bankrupt, they will also receive their share of the payments first. However, there are also disadvantages here - central banks of this type do not provide voting rights at a meeting of the company’s shareholders, and their holder does not have the right to participate in the management of the joint-stock company.

It should be noted that if debt is generated on the above shares, shareholders owning this type of securities are given the right to vote at shareholder meetings until full repayment debt. This is a kind of motivation for quick settlements with holders of preferred securities.

Cumulative preferred shares are securities on which dividends can be accumulated. In other words, if for a certain reason they were not paid, or dividends were paid partially, the unpaid amount is added to the subsequent payment. In this case, debt repayment is carried out again as a matter of priority, before dividends are accrued on other shares, both ordinary and preferred.

If a joint stock company is experiencing financial difficulties and is unable to fully fulfill its obligations to shareholders, dividend payments may be suspended to allow the company to focus on paying off certain debts and expenses. After the company gains stability and resumes dividend payments, the owners of shares - be they ordinary or preferred - will not be compensated for payments for the period of financial difficulties of the company. Moreover, payments will not be made until the company pays dividend debts to the owners of preferred cumulative securities.

Cumulative shares and non-cumulative shares also differ in that in this case the owners of cumulative shares will be paid the debt in full, even for the period in which payments were suspended.

Dividend calculation example

Consider the following example. Suppose that the company issued shares with a par value of 1000 American dollars. Annual interest rate is 5%. A year later, another economic crisis occurred. The company that issued the securities is not able to pay dividends to them in full, but can only pay 50% of the amount. As a result, the owners of the securities receive a dividend profit per share of 25 US dollars and the company owes them the same amount.

A year later financial situation the enterprise has deteriorated and dividend payments have been suspended completely. At the same time, the debt on preferred cumulative securities increases by another 50 US dollars. Consequently, the amount of debt of this joint stock company reaches 75 US dollars per share.

Another year later the company overcomes economic crisis and starts paying dividends again. In such circumstances, priority is given to the indebtedness of the cumulative preferred notes in an amount equal to US$75 per share, together with current amount 50 dollars. The total dividend amount is $125.

Only after repayment of the debt can the joint-stock company resume payments on other types of shares, starting with preferred and ending with ordinary shares, if at that moment the company still has cash left.

Shares are divided into ordinary And privileged. The combination of these two types of shares is called share capital.

The owners of such shares are shareholders of the enterprise (company) and own shares of the enterprise in proportion to the shares they own.

Ordinary shares

Ordinary share

Advantages of common shares

give the right to manage the enterprise: voting at general meetings of shareholders, participation in supervisory and management bodies;
give the right to receive dividends;
give the right to receive information on economic activity enterprises;
give the right to receive part of the enterprise’s property in the event of its bankruptcy or termination of activity.

Disadvantages of common shares

in case of unprofitable activity of the enterprise, dividends are not paid;
refusal to pay dividends by decision of the majority of shareholders;
as a result of the bankruptcy of the enterprise and the sale of its property, they are given the last right to the remaining property.

Shares bring together small scattered savings of investors in order to solve large economic problems

Preference shares

Preference share is a security that secures ownership of a certain share of the property of an enterprise.

Preferred shares are issued in an amount not exceeding 25% of the share capital.

Advantages of preferred shares

give a preferential right when distributing profits in the form of dividends;
give a preferential right over ordinary shares in the event of bankruptcy of the enterprise;
give the right to receive a pre-agreed dividend if the enterprise receives a small profit;
give the right to vote upon liquidation, reorganization of an enterprise or on introducing amendments and additions to the company’s charter that limit or change the rights of shareholders;
give the right to vote if at the annual meeting of shareholders a decision is made on non-payment or incomplete payment of dividends established on preferred shares (with the exception of holders of cumulative preferred shares).

Disadvantages of preferred shares

do not give the right to manage the enterprise;
an insignificant dividend compared to ordinary shares if the company receives large profits.

Thus, owning preferred shares is less risky, but also less profitable.

Types of preferred shares

Cumulative those shares are considered for which the unpaid or incompletely paid dividend, the amount of which is determined in the charter, is accumulated and paid subsequently.

For example, if during the issue of preferred shares it was established that the dividend on them is paid in the amount of 14% of the par value, and by decision of the general meeting of shareholders it is not paid this year, then next year the dividend on the cumulative preferred share will be 28%.

The issue of such shares can attract investors with the opportunity to increase their income. If the owner of a preferred share of this type decides to sell it when dividends are not paid, he will be forced to sell it at a low market value. The person who purchased such a share has the opportunity to receive dividends for the entire period during which they were not paid. In addition, the owner of a cumulative preferred share, in accordance with the procedure established by law, receives voting rights.

By non-cumulative shares do not accumulate dividend arrears. If the issuer is able to pay all or part of the dividend, it pays. If there is no profit, no dividends are paid!

Redeemable shares have a fixed redemption date, making them similar to debt instruments. Repayment can be made at par or with a premium.

Participants shares are rare. They actually provide for the possibility of receiving dividends exceeding fixed rate. If the profit level exceeds that agreed upon for a given share, then the shareholder receives a higher dividend.

Convertible are a hybrid instrument because they can be exchanged for ordinary shares at a certain time and under certain conditions. Convertible shares make money when common shares make money.

Convertible shares require their exchange:

in other securities;
for shares with a higher par value;
for shares with a lower par value;
for shares with a large volume of rights;
for shares with fewer rights.

Most preferred shares are non-participating, cumulative and non-redeemable.

They have the properties of both bonds - debt instruments, and shares - stock market instruments.

Preferred shares are similar to bonds in that:

they pay a fixed annual dividend in the form of a percentage of the nominal value of the share, which does not depend on the profit received by the organization4
holders of these shares receive dividends before payments on ordinary shares and their income is guaranteed to a greater extent.

Share parameters

Shares are characterized by the following parameters:

current market price;
dividends;
interest rate on dividends;
number of dividend payments per year;
actual value;
current profitability;
volatility of the share market price.

Preference shares- these are those that have a number of privileges (advantages) in dividends compared to. But, unlike them, they may have restrictions on participation in the management of the company.
The specific rights and restrictions of preference shares are established in national legislation and the company's articles of association.
The par value of preferred shares should not exceed 25% of authorized capital joint stock company.

Differences between preferred shares and ordinary shares

Unlike ordinary shares, preferred shares have a number of advantages: the opportunity to receive guaranteed income, priority allocation of profits for payment, priority repayment of the value of the share upon liquidation of the joint-stock company.

Preferred shares usually provide for a fixed fixed income payment, unlike ordinary shares, whose dividends fluctuate depending on the company's profits. At the same time, the rights to participate in the management of the company may be significantly limited.

As a rule, in Russia there are significant restrictions on preferred shares for participation in the management of a company, in contrast to ordinary shares. This is due to the fact that the mass privatization of enterprises according to types 2 and 3 provided for the transfer of preferred shares to the workforce, while depriving them of the right to vote at shareholder meetings.
But, on the other hand, preferred shares can sometimes give additional rights in the management of a joint stock company. It is generally assumed that shareholders owning preferred stock form an independent group of shareholders that has veto power over certain company decisions (for example, mergers and acquisitions).

Dividends on preferred shares

Dividends of such shares are often fixed in the form of a certain share of the accounting net profit or in absolute monetary terms. Preferred shares can be paid both from profits and from other sources - in accordance with the company's charter.

Cumulative preferred shares retain and accumulate the obligation to pay dividends, while the dividend accumulation period is fixed. In case of non-payment of dividends on cumulative shares, their owners receive voting rights for the period until the dividends are paid.

Currently according to Russian legislation, if dividends are not paid on preferred shares, then such shares provide shareholders with voting rights general meeting shareholders.

Preferred and cumulative shares

Preferred shares are divided into:

A) Privileged- have a number of privileges in exchange for the right to vote. Their owner has a determined amount of income at the time of issue and placement. The liquidation value has been determined. Priority when calculating these payments in relation to ordinary ones.

b) Cumulative(accumulating) shares - have the same privileges. At the same time, they retain and accumulate an obligation to pay. And the dividend accumulation period is fixed. If dividends are not paid, holders of this type of shares receive voting rights for the period until dividends are paid.

Analogue of preferred shares - founding share- a share distributed among the founders of joint stock companies and giving them some preemptive rights. Holders of such shares may.

(security), the owner of which, under certain circumstances, may not expect to receive dividends. This is possible when a joint-stock company misses a payment for various reasons, and retroactively (after some time) dividends are no longer paid.

Non-cumulative preferred share: essence and place in classification

When issuing preferred shares, the organization aims to attract more additional capital, which can be used as its own funds. Like ordinary shares, preferred shares form the charter of an enterprise. The peculiarity of such a security is the features common to stocks and bonds.

The issue of preferred shares can be made in two forms (depending on the features of dividend accumulation):

1. Cumulative preferred shares. The company's work involves certain risks. The emergence of financial problems may lead to missed dividend payments to its shareholders. In such a situation, the debts of the JSC are not “forgiven”, but are transferred to the next reporting year. The accumulation of unpaid dividends occurs in special “Ariyas”, so the issue of debt repayment is a matter of time. In practice, all arias must be covered before payments on common shares are made. That is, preferred shares have some immunity in this regard. The dividend accumulation period is no more than three years.

It is worth understanding that dividend payments cannot be attributed to the debt obligations of the joint-stock company (company). Consequently, holders of preferred shares may not receive money. This is possible in cases where the company does not intend to pay holders of common shares.

2. Non-cumulative preferred shares. When compared with the previous type of assets, there is one big difference. If it is impossible to make dividend payments in current year, is not accumulated and is not paid subsequently. As a result, the company can calmly settle accounts with holders of common shares, without regard to debts in relation to holders of preferred securities.

This feature of non-cumulative assets is the main reason for the decline in investor interest in them. This is due to the fact that the shareholder does not have guarantees of receiving dividend payments. In addition, the owners of such securities are last in line when covering costs to shareholders. The low attractiveness of non-cumulative preferred shares leads to the fact that companies are issuing them less and less often, preferring cumulative preferred or ordinary shares.

In addition, there are several other types of cumulative and non-cumulative shares (according to the subtleties of dividend calculation):

1. With a fixed dividend. The peculiarity of such assets is that the dividend amount is established during the period of issue and does not change throughout the entire life of the share. Moreover, the security itself is perpetual. Fixed payments carry an additional risk for the issuer, because with a further reduction in interest rates, payments will still be made at inflated rates established at the time of issue of securities. If interest increases over time, then the risk is already on, which receives a limited (lower than market) dividend.

2. With an additional dividend. Shares with such payments are often called "participating" securities. Their peculiarity is the presence of a lower limit on dividends, which must be paid under any circumstances. At the same time, the terms of payments for additional dividends are constantly negotiated and can be adjusted by the issuer.

One of the conditions may relate to dividends on common (ordinary) shares. Thus, if the dividend on the latter is higher than on preferred assets, then additional dividend payments are made first to holders of preferred securities. This is done in order to equalize the size of dividends across various types assets.

For example, if the lower level of dividend on preferred assets is 10 rubles, and on simple assets - 12 rubles, then additional dividend for preferred assets it can be 2 rubles.

3. With an adjustable rate. Such assets are issued first. The goal is to reduce the interest rate risk of both parties to the transaction (both the buyer of the asset and the issuer). They first appeared with a changing rate back in 1982, in the USA. The volume of quarterly payments on securities, as a rule, is tied to the level of profit on government assets. As a result, the dividend on preferred shares changes regularly (once a quarter).
In practice, the dividend level is almost never equal to the average yield. This is due to two limitations:

For the buyer of shares (investor), special profitability limits (upper and lower) are provided. As a consequence, the size of the dividend can only be determined within a certain specified interval, for example, from 5 to 10 percent;

When setting dividend payments, you can count on a discount from the yield of government bonds. This feature is explained by the fact that the return on shares is formed from two elements - an increase (increase) in the exchange price and an increase in dividend payments. That is why, when setting the size of dividends on shares, up to 1.5% of the total yield of government bonds can be made.

The peculiarity of this approach is in reducing the degree of risk for non-cumulative and cumulative shares. Unfortunately, it is still not possible to completely remove it. For example, if government securities exceed the upper yield level, the issuer will have to pay an inflated percentage to its shareholders.

4. With auction bid. Such shares were first issued in 1985 (also in the USA). The essence of assets is to set the dividend amount through an auction financial company or a bank. At the same time, those wishing to buy preferred assets place their bets (the number of shares desired and the optimal level of dividend). After receiving all applications, the investor summarizes the information and displays the average level of profitability. Those applications in which the expected dividend is lower than the calculated one are satisfied. An interesting fact is that such preferred shares are transferred to holders with the same percentage.

Non-cumulative preferred shares: features, limitations, pros and cons

Preferred assets (both cumulative and non-cumulative) have their own characteristics:

The holder of such a security cannot count on a vote on the board of directors, that is, privileged. An exception occurs only when a decision is made to stop the activities of the enterprise or liquidate the joint-stock company;

The owner of a preferred share receives fixed dividend payments (unless otherwise provided), regardless of the results and success of the company. But in the event of financial failures, dividend payments on non-cumulative preferred shares are often skipped altogether;

An investor (holder of non-cumulative securities) can count on covering losses in the event of liquidation (bankruptcy) of a JSC. The only downside is that this happens last, but before payments are made to holders of ordinary shares;

The accumulation of dividend debts on non-cumulative preferred shares does not occur (unlike cumulative ones), which carries significant risks for the investor.

Preferred shares may be claimed by the issuer without giving reasons to the holders. But in this case, the company must fully cover the damages of shareholders, taking into account their interests.

Non-cumulative preferred shares have their positive and negative aspects. The advantages of such assets include:

Priority receipt of dividends, that is, before payments are made to holders of ordinary shares;

The payout level for preferred shares is often higher than for common shares;

In the event of liquidation (bankruptcy) of the issuing enterprise, the chances of getting their funds back are much higher than for holders of ordinary securities.

The benefits listed above make non-cumulative preferred stock a cross between fixed income assets (such as bonds) and stocks. But compared to common shares, the value of preferred securities tends to respond more strongly to adjustments (increases or decreases) in interest rates.

The disadvantages of non-cumulative preferred shares include:

The dividend received will have to be paid. A higher shareholder implies special attention from tax structures. As a result, you will have to part with a certain part of the profit;

The level of profit received on preferred shares is almost equal to the income on bonds for the same company, but in the case of debt securities the risk is lower;

If problems arise at the enterprise and a decision is made on non-payment of dividends, holders non-cumulative shares debts will not be repaid.

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