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Dear Sir,
I always get confused regarding the shares arrangement from highest to lowest risk from lenders/creditors point of view.
is there a simple way of understanding it?
Many thanks.Two things affect the risk.
One is as to how certain investors are to receive their interest or dividends each year – the more certain the lower the risk.
So debt lenders are the most certain (because it is fixed interest and they get paid first), preference shares are next certain (because their dividends are fixed, and they are the next to be paid), equity shares are the least certain (because their dividends depend on what the profits are and whether there is any money left after paying the other).The other thing is how certain they are to get their money back if the company collapses. The order is the same – debt get paid first, then preference, then equity if there is anything left. Secured debt are more certain than unsecured debt (and therefore less risky) because they can take the specific assets that the debt is secured on.
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