Sources of Business Finance — OCM STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance5 Marks
Question
Give meaning of preference share and explain its characteristics.
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Answer
Introduction :
In company form the Preference Share is considered important to obtain capital.
To run business company issues various types of preference shares to attract different types of people having different mentality.
Investors of various trends are attracted by Preference Shares. Some investors prefer to invest mostly in Preference Shares to earn fixed, regular income.
What is Preference Share :
"In the distribution of dividend or when the company is closed or goes in liquidation and while returning the money of shares, the shares which get the first preference are called the Preference Shares".
It has the first right to get dividend from the profit of the company.
Characteristics of Preference Shares : They are as under :
First right to get Dividend :
Shareholders of Preference Share has the first right to get dividend at fixed rate.
Right to Vote :
Preference Shareholders have the right to vote only in the matter that affects them.
Preference :
Investor who desire to have steady, fixed, income and safety of capital prefer to purchase this type of share.
Repayment of Capital :
In case of liquidation or dissolution of company compare to Ordinary Shareholders the Preference Shareholders are given the refund of capital after the money is paid to creditors.
Market Price :
Market price of Preference Share is fixed when the interest rate changes its market price also changes.
Proportion of Risk :
Financial risk is comparatively low. Preference shareholders of Shares have first right to get refund of capital and they get regular fixed interest.
Conclusion :
In the time of recession investors desire fixed, regular income.
They prefer to invest in Preference Shares.
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