Like bonds, preference shares provide regular and defined income payments and generally have a fixed maturity date.
However, as with ordinary shares, the income from preference shares comes in the form of dividends, which will either be paid at a fixed or floating rate.
As a preference shareholder, you rank ahead of ordinary shareholders in the queue to be paid dividends or for claims on the company’s assets if it goes out of business.
Preference shares vary in terms of structure and risk, and like with any investment it’s important to fully understand them before investing.
How to buy preference shares
When companies issue preference shares, they publish a prospectus to go with it, outlining all of the important features, risks and other considerations.
You can apply to buy preference shares directly from the company or you can buy them through a broker once they are listed on the ASX.
If you buy them on the stock exchange, you will pay the market price, as you do with shares and bonds, rather than the issue price.
Selling preference shares
Most preference shares, if you hold them until their maturity date, will be converted into ordinary shares, usually at a discount to the market price at the time.
But if you sell preference shares before they mature, you’ll have to sell them on the ASX and accept the market price at that time, which may be above or below their face value.