Can Preference Shares Be Traded in Stock Market?

Most investors view stock market investments as the purchase and sale of ordinary shares. Preference shares, on the other hand, are shares that have characteristics of both equity and debt. Normally, preference shares provide fixed dividends and have priority to ordinary shareholders when it comes to payment of dividends and in case of liquidation.
 

The common query is whether or not preference shares are traded. In simple terms, preference shares can be traded but there is a significant difference with regard to whether they are listed and the level of liquidity.
 

This article provides an overview of how preference shares are traded, their listing details, the differences between ordinary shares and preference shares, and important considerations for any intending investor.

What Are Preference Shares?

Preference Shares is a type of shares where the investors get certain privileges over the equity shareholders.
 

Some of those privileges include:
 

• Priority when it comes to dividend payments.
• Priority when it comes to company liquidation.
• Fixed dividends in many instances.
• Very limited or no voting power.

Ordinary shares do not offer such a great benefit of increase in company share value as preference shares do.

Can Preference Shares Be Traded?

Yes, preference shares may be traded provided that they have been listed on a recognised stock exchange, such as the NSE or BSE.

There is a notable difference, however.
 

• Preference shares listed on a stock exchange may be traded using a trading account.
• Unlisted preference shares are not allowed to be traded on the stock exchanges and are transferred privately.

Often enough, listed preference shares trade in much smaller volumes compared to ordinary equity shares. 

How Are Preference Shares Traded?

The method of trading is the same as the one for trading in equity shares.
 

Step 1: Opening a Trading and Demat Account

One requires a trading and Demat account to be opened.

Step 2: Looking for the Listed Preference Share

Only those preference shares that have been listed will show up.

Step 3: Placing Orders

One may place market orders or limit orders.

Step 4: Settlement

The shares are credited or debited to your Demat account according to the rules of the exchange.

Even though the process of trading is easy, locating buyers/sellers might take time due to lack of liquidity.

Where Are Preference Shares Listed?

Some firms opt for listing of their preference shares in the stock markets of India.
 

These include the following:

• Convertible preference shares
• Non-convertible preference shares
• Some listed corporate preference issues
• Not all companies list their preference shares.

Why Liquidity Matters?

Liquidity is defined as the ability of an investment to be purchased or sold without changing the price.
 

Preference shares usually encounter:

• Less trading volume
• Greater bid-ask spread
• Fewer numbers of buyers and sellers
• Difficulty in executing larger trades

This implies that an investor cannot take for granted their ability to withdraw from their position whenever they please.

Preference Shares vs Equity Shares

This comparison highlights why preference shares are often viewed differently from ordinary shares.

Types of Preference Shares

The companies may issue several types of preference stocks depending upon the needs of the company.
 

• Redeemable Preference Stocks - Such stocks are redeemed after a certain period.
• Convertible Preference Stocks - Such stocks may be converted to ordinary stocks based on certain conditions.
• Cumulative Preference Stocks - Such stocks carry dividends which accumulate and may be paid at a later stage.
• Non-Cumulative Preference Stocks - Such stocks do not have accumulating dividends.

Advantages of Trading Preference Shares

Preference shares provide some benefits for the investor who is looking for a steady flow of income.
 

• Dividend Precedence -Preference share holders always have precedence over equity shareholders when dividends are paid out.
• Price Stability -The prices are usually more stable than that of common stock.
• Diversification of Portfolio -Preference shares allow access to another form of company security.
• Dividend payouts - Preference shares have a fixed dividend payment structure.

Limitations Investors Should Know

There are some disadvantages that preference shares possess as well.
 

• Liquidity -It may be difficult to sell them easily.
• Price Appreciation - They do not share in the growth of the company as much as equity shares.
• Interest Rates - Changes in interest rates might influence them.
• Voting Rights - The shareholders have lesser voting rights compared to the equity holders.

To know more about advantages and disadvantages of preferences share, read our full blog on preference share advantages and disadvantages.

Who Should Consider Preference Shares?

Preference shares may suit investors who:
 

• Want priority in dividend payments.
• Understand lower liquidity risks.
• Are comfortable with long-term holding periods.

They may be less suitable for investors seeking aggressive potential price appreciation.
 

Conclusion

So, is there any possibility of trading preference shares? Yes, if these shares happen to be quoted on a recognised stock exchange. Unlike other equity shares, however, the trading volumes of many preference shares tend to be relatively low.

Before purchasing a preference share, it is important to know whether such shares are quoted on a recognised stock exchange and their features regarding dividends and redemption among others. If you're managing investments through online banking, keeping your banking services secure is equally important. Read how to Block a Bank of India ATM Card if your card is lost or compromised.