Preferred shares are a perpetual financial product, although the investor can redeem them after the first five years of obtaining them, always with the prior authorization of their supervisor. These types of products range between a type of fixed and variable remuneration, are granted by public and private financial entities and do not grant any political right to the investor over them. If the issuing entity went into bankruptcy or rescue, the investor of the shares would be the last to collect their remuneration, a risk that would involve the loss of even the total capital invested.
Preferred shares carry a series of risks that every contractor must know, such as:
- Risk in not receiving any type of remuneration Risk of absorption of losses of money Risk in the order of priority (behind both common and subordinated creditors of the issuing entity itself and at the same level as any other preferred of the same condition Risk in the liquidation of the issuance of the product Risk in the variation of credit quality.
In addition to taking into account the risks involved in contracting this type of banking services, it is important to keep in mind and know the risks in their settlement. Much of the analysis and research on preferred shares includes their liquidity as an adjacent risk.
The risks that we can find regarding the liquidation of a preferred product focus on three types of risks:
- Perpetuity risks (duration of the contract for its amortization) Market risk regarding the purchase and sale of the product Risk in the liquidity of the financial product, finding the possibility of selling it at market price.
First of all, we must focus on the risk that we would have in terms of the perpetuity of the preferred ones. These have a perpetual nature, that is to say, of a certain duration to be able to make their amortization. The bank or financial institution can amortize the product once five years have passed since its hiring, however, it is a voluntary option, it all depends on the benefits obtained by the issuing entity. If profits are not obtained, the shares lose their periodic profitability, something that makes it impossible to recover them in the future by not having political rights over them.
In case of liquidation of the bank or savings bank, the collection of the same does not belong to the holders but to the shareholders in the first place. Unless this product can be sold in a secondary market, it poses a high risk of losses as it is the financial instrument with the least liquidity.
Secondly, we would focus on the risk that we would find in the market when wanting to sell a preferred product. Preferred shares, as we well know, are securities offered by banks that pose a high investment risk and that can cause large losses in the nominal amount invested. Once a preferential service has been contracted, the investment can only be recovered by selling its securities in a secondary market, a complicated process due to the malpractice of financial institutions when establishing internal ceases in operations. Banks offering fraudulent preference shares,they concealed relevant information by "selling" to customers a product that gave a false sense of liquidity (typical examples of entities such as Bancaja or Caja Madrid), selling to other customers the preferred ones issued at a nominal value outside the market. This type of questioned actions are those that have triggered the alarm among users.
Third, it is essential to bear in mind the risk that is run with the liquidity of the preferred shares. We refer, as we have indicated roughly in the previous point, to the sale of preferred shares in a secondary market. This section is vital since being a product of perpetual duration, the only way to recover part or all of the invested capital is through the sale of it.
The market in which the sale of preferred shares should be carried out is called AIAF, whose operation is based on the provisions of Law 24/1998 on the securities market in addition to the current regulations of the Bank of Spain. The AIFA Fixed Income market is under the control and supervision of the CNMV.
The misuse of these types of markets when making specific purchases and sales of preferred shares, resulted in the creation of false prices around them, placing them high values.
If, instead of buying and selling between the clients of the entities themselves, the holders or retail investors had assumed the losses that would reflect in a secondary market with independent buyers and sellers to the entities, the false appearance of comparing the preferred shares with a deposit a fixed term would have been broken, showing the customer who opts for this type of product, the true face of the coin, that is, the risks that the preferred ones entail.
It is important to bear in mind that it is a regulated secondary market to avoid fraud in the purchase and sale of financial instruments offered by savings banks. A regulated market is one that contains multilateral systems that allow it to gather different buying and selling interests on financial instruments, in order to be able to enter into contracts with respect to financial products that have been accepted in a negotiation and that are authorized and their operation is regular. The financial instruments that are “offered” in a regulated market are under the regulation and action of a specific regulation.
A user who hires this type of service is usually not aware of the risks it poses to their invested capital and signs a contract without knowing the facts. For those who, in one way or another, have been “deceived” by entities and savings banks, it is convenient to take measures in this regard to be able to recover at least part of the investment.
Before buying or selling a banking service such as preferred shares, we must know 100% each and every one of its conditions to avoid a "distortion" in the operation procedure and thus avoid unnecessary risks.
