Making sure you know the difference between preference shares and redeemable preference shares is extremely important. Preference shares are usually yours to keep until you decide you want to sell them, or until a company liquidates. Redeemable preference shares are different, they are liable to be bought back by the issuing company on a date specified when the agreement was created, or after a period of notice. This means that you have to be very sensible when investing in redeemable preference shares as you may lose them when you do not particularly want to.
Choosing a Redeemable Preference Share
So what exactly are redeemable preference shares created for? Usually it is so a company can create quick equity for their business when they intend to expand or grow. This means that when you enter into a deal for redeemable preference shares you know that at some point the company will want to take them back from you. Usually at the end of this period your redeemable preference shares will be bought back by the company for a price, or they will offer you the chance to change your shares for common shares. Consequently taking away your right to a dividend, and in some cases making your shares less valuable. This may not be the case in an ever-expanding company, and if you realise that your redeemable preference shares are making money, you may want to continue your investment through common shares. If your redeemable shares are matured, then you will always get the face value, and any dividends owed back. Consequently they can be seen as an extremely lucrative investment.
I Have a Cumulative Redeemable Preferred Share
If you end up with a redeemable preference share, and the dividend is not paid to you then your share may end up becoming a cumulative preference share.
These shares will accumulate any dividend that is not paid when it is due, although usually the dividend should be paid on time. If you have a cumulative preference share then make sure that your share is tracking the dividends that it is owed, and that you are going to be paid the money. When the company that issued the shares begins to buy back on maturity, cumulative preference shares should end up returning you more on your investment in a lump sum than any other share. Consequently seeing your redeemable shares develop into cumulative shares may not be a bad thing, and at the end of your investment you may have a significant payday.
Check your Share Investments
It is important to remember that all redeemable shares are issued on the premise that they will eventually be bought back by the company. It is a quick way of the company that has issued them to gain money and investment, and they may also see it as a quick way of removing shareholders. You can always reinvest into common shares upon maturity, but remember if share prices have risen your lump sum repayment is going to be a significant sum of money.