What are preference shares and debentures ?

Preference shares

Shares issued by the company to distribute dividends at a fixed rate from the profits earned by the company are called preference shares. It is called preference share because it has priority rights over ordinary shareholders in relation to dividends distributed by the company. Similarly, even if the company goes into liquidation, the priority shareholders have the priority to receive their investment and accumulated dividends. For this reason, investment in preference shares is considered relatively less risky. But if the concerned company does not earn profit in any year, the preference shareholders cannot get the dividend at the specified rate. On the other hand, no matter how much profit the company earns, the preference shareholders cannot receive more than the specified rate of dividend. In this way, the risk of investing in preference shares is low and the return is also low.

Preference shareholders are not allowed to participate in the annual general meeting of the company, except when discussing matters related to their rights and interests. Preference shares are considered as securities of mixed nature because they have features of both ordinary shares and debentures. Preference shares can be cumulative (if the company has made a loss in a year and cannot pay dividends, then dividends must be saved and paid out of the next year's profits) or non-cumulative, redeemable (paid back after a certain period of time) or non-redeemable and convertible (can be converted into ordinary shares after a certain period of time) or non-convertible. They are natural. 

Debenture

A debenture is a bond issued on the condition of paying principal and interest at a specified rate and time. Its face value is usually Rs. 1000 is. Debenture holders receive interest on their investment amount annually or semi-annually at a fixed rate. Debenture holders receive interest on ordinary shares and preference shares before dividends are paid. Even if the organization is in loss, the debenture holders will not have any problem in getting the prescribed interest. The relationship between the venturer and the organization is like that of a creditor and a debtor. If the company is unable to provide interest at the specified rate and time, the debenture holders can initiate proceedings to send the company into liquidation. Investors who do not want to take risk often prefer to invest in debentures. The debenture holders do not get the opportunity to participate in the company's annual general meeting and do not have voting rights.

Debentures are secured (issued against the assets of the company as security or pledge) or unsecured, redeemable (repaid after a fixed period of time) or irredeemable and convertible (convertible into ordinary shares after a fixed period) or non-convertible in nature.