Advantages and Disadvantages of Preference Shares
The Advantages of preference shares are given as follows:
- Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment;
- Preference shares are useful for those investors who want the fixed rate of return with comparatively low risk;
- It does not affect the control of equity shareholders over the management as preference shareholders don’t have voting rights;
- Payment of fixed rate of dividend to preference shares may enable a company to declare higher rates of dividend for the equity shareholders in good times;
- Preference shareholders have a preferential right of repayment over equity shareholders in the event of liquidation of a company;
- Preference capital does not create any sort of charge against the assets of a company.
The major limitations of preference shares as the source of business finance are as follows:
- Preference shares are not suitable for those investors who are willing to take the risk and are interested in higher returns;
- Preference capital dilutes the claims of equity shareholders over assets of the company;
- The rate of dividend on preference shares is generally higher than the rate of interest on debentures;
- As the dividend on these shares is to be paid only when the company earns the profit, there is no assured return for the investors. Thus, these shares may not be very attractive to the investors;
- The dividend paid is not deductible from profits as the expense. Thus, there is no tax saving as in the case of interest on loans.