What Are Redeemable Preference Shares?

Redeemable preference shares give investors a piece of ownership in a company, but these shares confer different rights than common stock. In addition, the company has the right to buy the shares back if it chooses.

Preferred Shares

Among domestic investors, preference shares are more commonly referred to as "preferred" shares. Holders of a company's preferred stock are guaranteed to receive dividends before holders of the company's common stock. Preferred shareholders also have a higher-priority claim on the company's assets in the event the firm goes out of business and liquidates. However, unlike owners of common stock, preferred stockholders typically do not have voting rights. Preferred shares trade in the stock market like common shares do, but their prices tend to be less volatile. That's because their value to investors lies mostly in their steady, guaranteed dividends, making them similar to a fixed-income security like a bond.

Redemption Prices

When a preferred share is redeemable, the company that issued it can require the shareholder to sell the share back to the firm at a set price. Companies redeem preferred shares to avoid paying the guaranteed dividends. Preferred dividends can be suspended, but the company cannot pay dividends to common shareholders until it pays preferred shareholders everything they are owed. The redemption price effectively puts a price ceiling on the share. If the redemption price is, say, $100 a share, investors would be unlikely to pay more than that, since they would be guaranteed to lose money if the company "called" the stock for redemption.

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