Banking entities offer us various financial products by way of investment and growth of our money, as is the case of preferred shares, however, do we know the risk that this entails?
Preferred shares are a bank instrument that has hybrid characteristics of both equity and debt. This type of product is considered as securities issued by a banking entity, which do not require participation or voting rights regarding its capital. These participations have a perpetual character and their profitability is usually variable, which means that the profits that may arise around them are not guaranteed.
As it is a complex product, it involves added risk, a high risk that may or may not generate profitability and that can cause significant capital losses. The preferred shares do not grant any rights over the investor, however, they offer a remuneration according to the obtaining of benefits. In addition, its duration, as has been well named, is perpetual although the investor user can amortize it, always with prior notice, after the first five years.
Bank investment products pose a high risk in relation to the possible loss of money, in the event that the entity fails, investors of this type of instruments would collect the latter. The entities launched the preferred shares to the financial market to add for the purpose of calculating own funds, both from individuals and from outside investors. These types of products are an alternative to increase the invested profits without modifying the participation and performance of the shareholders as well as their vote.
When opting for an investment “fund”, many users are attracted to this type of banking products which appear to obtain a high return on invested capital. This attractiveness in terms of profitability is usually reflected in remunerations of a fixed 5.75% with a period of five years. After this period, interest rates vary according to the current Euribor index.
Due to the bad practices of various banking entities, it is necessary to take measures and be well informed before purchasing a product of these characteristics, as some of these issues pose a high risk of capital loss, in addition to the fact that certain of the conditions of the contracts of holdings are generally considered unfavorable to investors.
Despite this, many are the clients of financial companies that have decided to choose to invest certain amounts of capital to obtain profitability and future profits. However, its profitability is not guaranteed and the risks in the partial or total loss of the capital invested are remarkably high. If the bank does not achieve the necessary benefits and solvency to obtain a remuneration with these participations, investors will not receive the corresponding coupon, which would lead to a loss of money.
If there was a possibility or risk that the financial institution would fail, if it is not backed by the Deposit Guarantee Fund, the investor or investors in the participations would not have the right to be compensated for the loss of money that said bankruptcy would entail. not being covered. In addition to this, the investor could reflect a total loss of his invested capital since, as he does not have a guarantee of economic perception of the value of his units, when he sells them he may not obtain the value for which he paid for them.
The preferred shares, being a perpetual instrument, can only obtain liquidity from them by selling them in a secondary market where they can be listed on their own or through the entity that issues them. These types of products are difficult to sell and there are no buyers who risk obtaining preferred shares on a perpetual basis and without guarantees.
Opting for this type of product involves a general risk between profits, profitability and liquidity in the sale. Financial institutions often do not show all the information that a particular investor would need before investing certain amounts of money, a penalized and judged practice. It is important to have the advice of a financial lawyer to be able to exercise caution and on a terrain where we are not at high risk of loss.
