The Preference shares:
1. are relatively safer investments than equity shares
2. are traded in stock exchanges
3. are relatively more liquid assets than the equity shares
Choose the correct option from the codes given below:
The preference shares are safer investments than the equity shares. In case the company is wound up and its assets (land, buildings, offices, machinery, furniture, etc) are being sold, the money that comes from this sale is given to the shareholders. After all, shareholders invest in a business and own a portion of it. Please note that usually, the preference shares are most commonly issued by companies to institutions.
That means, it is out of the reach of the retail investor. For example, banks and financial institutions may want to invest in a company but do not want to bother with the hassles of fluctuating share prices. In that case, they would prefer to invest in a company’s preference shares. Companies, on the other hand, may need money but are unwilling to take a loan. So they will issue preference shares. The banks and financial institutions will buy the shares and the company gets the money it needs. This will appear in the company’s balance sheet as ‘capital’ and not as debt (which is what would have happened if they had taken a loan). Preference Shares are NOT traded in stock exchange.
This also means they are not ‘liquid’ assets; there’s little scope for the price of these shares to move up or down. On the other hand, ordinary or equity shares are traded in the markets and their prices go up and down depending on supply and demand for the stock. But, that does not mean the investor is stuck with his shares. After a fixed period, a preference shareholder can sell his/ her preference shares back to the company. This cannot be done with the ordinary shares. Ordinary shares can be only sold to another buyer in stock market. One can sell the ordinary shares back to the company only if the company announces a buyback offer.
This question is a part of GKToday's Integrated IAS General Studies Module