BlackBull Markets provides you with the world-renowned MetaTrader 4. Download it on the platform you prefer. Find out more.
Virtual Private Servers
VPS TradingNYC ServersBeeksFX

About us

Based out of Auckland, New Zealand, we bring an institutional trading experience to the retail market.

As you progress on your investing journey, many new words and anagrams will appear. Having a complete understanding of these words can help minimise misunderstandings and misinterpretations, and consequently, costly investing mistakes.

In this article, I have ventured to explain what constitutes a Preference Share, hoping to help round out your investing knowledge.

1. What exactly are Preference Shares?

Preference Shares, otherwise known as Preferred Stock, can be thought of like a Corporate Bond. Preference Shares are ‘fixed income’ or ‘dividend shares’ that are prioritised over Common Shares when it comes to dividend payments.

In addition to priority dividend payments, Preference Shareholders also hold priority over Common Shareholders when it comes to recouping the value of their investment if the company is liquidated.

One downside of Preference Shares is that their voting rights are typically restricted or non-existent.

2. Cumulative vs. Non-Cumulative Preference Shares

Several kinds of Preference Shares exist, but the most common are Cumulative Preference Shares and Non-Cumulative Preference Shares.

For any dividends that a company cancels or fails to pay, a Cumulative Preference Shareholder will retain the right to be paid this dividend in the future. Moreover, the Cumulative Preference Shareholder will have to be paid any missed dividends before any future dividends can be paid to any other shareholder.

Non-Cumulative Shares do not have this same right.

3. Do Preference Shares exist in perpetuity?

While the majority of Preference Shares do not have a maturity date, there are means by which these Shares can be discontinued.

Preference Shares can be converted to Common Shares or removed from circulation altogether. To do so, the issuing company may have to pay a premium over the Preference Shares’ face value to recall them.

Alternatively, Preference Shares can be issued with the condition that gives the issuer the right to redeem or convert the shares at some specific price, some specific date, or when some other condition is meet.

What is an example of a Preference Share?

The Bank of America (NYSE:BAC) has several Cumulative and Non-Cumulative Preference Shares on its books, some dating back to 1997. From July to September 2021, the Bank of America issued 8 new series of Preference Shares. As illustrated in the table below, each series was issued with different conditions related to the dividend amount, the frequency of payment, and its redeemability.

​#interestingfact: The S&P 500 has not had a 5%+ drawdown from a peak for the past ten months.

This timeframe equates to over 200 sessions. As this hot run continues, more and more analysts come out of the woodwork, predicting that it will shortly come to an end. Perhaps these analysts are correct, and the S&P 500 will hit a wall at 4,500, a value the index crossed for the first-time last Friday. Coincidently, it was also the time the S&P 500 hit its 8th 100-point day for 2021.

As it currently stands, the S&P 500 is at 4,528.79, up another 19 points on Monday trading.

Of course, this consistent rise of the SPX is out of the norm and, therefore, concerns investors. While we cannot control the unforeseeable, we can follow the market announcements coming out of the US (or other appropriate regions) that might keep us abreast of possible changes in market sentiment and direction.

Economic reports

It is an atypically quiet week on the US reports front. It is not until Wednesday that the big boy reports are released.

ADP Employment Change

united-states-adp-employment-change S&P 500

The precursor to the Non-farm Payroll, the ADP Employment Change report, is forecasting 500K jobs added to the US private sector economy in August. Bear in mind that this report's estimates were off by more than 70% (330K vs 695K expected) last month.

If the ADP Employment Change number comes in at 500K, it will signal a big turnaround for the private sector job placement, which has steadily declined since a record 882K jobs in May. This decline could be forgivable if the 20 million jobs lost in April 2020 had since been regained. However, as it stands, the US economy is still down a net 4 million jobs.


NFP creeps in on Friday

The consensus is that 750K jobs have been added to the US economy in August, more than 100K less than expected last month. But, as we all know, NFP beat the expectations of July by a significant number and injected a great deal of optimism in the USD (see EURUSD chart).

How did this big NFP beat translate on the S&P 500?

S&P 500 NFP

Click to enlarge

For the past four NFP job reports, we can observe a pattern.

When the NFP disappoints, the S&P 500 has a rough few days. This rough patch is clearly illustrated in May, where the NFP reported a paltry 266K jobs vs an expected 978K. What ensued on the following Monday was three days of selling, resulting in the S&P 500 falling from 4,233 to 4,058. The SPX didn't gain back those losses until the day before the next NFP was released.

When the NFP beats, the S&P 500 falls, but by far less than when it misses. This begs the question: What will it take for the S&P 500 to react positively? I think it is waiting for an NFP to report more than a million jobs, like last reported in August 2020 (July Job numbers). Otherwise, the Russel 2000 Index will be the biggest beneficiary of the positive, but not grand, NFP reports.