What is preferred stock?

The preferred share is a portion of the capital of a company that, when acquired, gives its owner the preference in receiving dividends and interest on equity (JCPs).

In addition, it has the advantage of giving priority to the return of the invested capital, in case of bankruptcy of the company.

Together with the common share, it is one of the main types of shares traded on the Stock Exchange , under the category “forms of shareholder participation”.

One of the main differences between these two shares is the right to vote at corporate meetings and the appointment of managers. While this is a sine qua non condition for holders of the common share, the same privilege is not extended to those who own the preferred share.

Even so, this option moves a high volume of shares every day and it is impossible to invest strategically in the stock market without knowing its specifications.

How do preferred shares work?

According to the Brazilian Corporate Law, preferred shares without voting rights must represent a maximum of 50% of an organization’s quota volume. Thus, the largest proportion between preferred and common shares is 1: 1.

To identify it in the financial market, just look for the suffix 4, 5, 6 and 7.

  • For example: when you find the term PETR4, know that it is the code used for Petrobras’ preferred shares. The same is true of GGBR4, the Gerdau company code.

To acquire them, the process is the same as for other actions. That is, it is necessary to have an active account with a broker and send purchase orders. But, when acting as a trader , do not forget: defining your strategy and profile well before carrying out operations is essential!

What is the difference between a preferred share and a common share?

You already know that both actions are responsible for determining the degree of shareholder involvement in the investee, correct?

Now is the time to understand a little better how participation happens!

In the case of common shares, all those who own it have the right to vote guaranteed. That is, they can expose their positions and decide at the meeting.

In general, voting and vetoing are not integrated. Although he has the first, the ordinary shareholder does not have the second.

In turn, the holders of the preferred shares have neither one nor the other.

It is clear that the lack of a vote can be reversed according to the statute of each company.

In practice, however, it rarely happens.

In most cases, the reversal is only made due to the legal determination that obliges organizations to grant voting rights to preferred shareholders, in case of non-payment of remuneration earnings for more than 3 years. The account applies to both dividend recipients and JCP recipients.

What are the advantages of obtaining a preferred share?

Also according to the Brazilian Corporate Law, publicly traded companies that trade in this category have certain specific obligations towards their shareholders.

In addition to those previously mentioned (such as the priority over receiving earnings and refunds), there are special conditions.

In the case of publicly traded companies, preferred shares are guaranteed to be included in public takeover bids (OPAs) and, when this is done, the receipt of earnings equivalent to those distributed to ordinary shareholders.

In fact, this is not the only event of interdependence between the two types of actions.

When dividends are paid in common situations (that is, after the end of the year), preferred shareholders have the reserved right to pocket at least 10% more for each share than ordinary shares.

And what are the disadvantages?

As you might imagine, these “perks” are not delivered for free.

Actually, Law 6404/76 instituted them as a form of compensation to holders of common shares.

This is because they suffer from the lack of control over a vital component for the success of the investment: the company itself.

As they do not, in theory, have the right to vote at meetings, these shareholders cannot exert influence over future plans, changes, changes or even bankruptcy prevention.

That is, they reap only the profits or losses resulting from the agreements made between the voting shareholders.

This negative passivity is offset by the benefits granted in the previous section, so that the action remains attractive.

 

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