Preference Shares

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Preference Shares

Unlike loans to a company, buying shares gives you a stake in the ownership of a company. Ordinary shares are described on page 312, but preference shares are included here because they have various characteristics which are more akin to corporate bonds. Preference shares usually offer a fixed income, which is paid before any dividends to ordinary shareholders. Some preference shares have a redemption date, at which time they are bought back by the company, while others are irredeemable. In either case you can buy and sell them on the stock market.

Convertible preference shares give you the right to switch to ordinary shares in the company at a set price at or before some specified date, which gives you the option to switch from a fixed to a variable income and participate in the generally more volatile movement of ordinary share prices.

Type of return Income is in the form of dividends, usually at a fixed rate and paid half-yearly. You also stand to make a capital gain or loss, depending on the prices at which the shares are bought and sold. Tax treatment Income is taxable. The dividends are paid net of income tax at a special 10 per cent rate. Non-taxpayers cannot reclaim the tax deducted. Both starting-rate and basic-rate taxpayers have no further tax to pay. Higher-rate taxpayers have further tax to pay.

Capital gains are taxable, though you may have allowances to set against them (see page 63). How long you invest for No set period, because you can sell at any time on the stock market. But this is not the home for money you might need back at a set time or at short notice, since share prices might then be low. Charges Stockbroker's commission and spread between the prices which buyers pay and sellers receive.

Capital is at risk because of fluctuating share prices. You also have the risk that the company might go out of business. If it did, preference shareholders are in line for a payout ahead of ordinary shareholders, but the company might not have enough assets to stretch even to the preference shareholders, in which case you would lose all your capital. This should be a small risk with large, well-established companies, but a major consideration with companies struggling to get established or going through a bad patch. Fixed incomes are vulnerable to inflation.

Risk rating: around five for blue chip companies to ten for riskier ventures.

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