What is Preference Share

When the company is liquidated, preference shares give individuals a preference over equity shareholders for dividends and assets.

As a general rule, preference shares are issued by companies when they need large amounts of funds in a short period of time, which makes them ideal for big investors, mutual funds, and large financial institutions.

The shares of preference shareholders cannot be sold on the stock market, as they cannot be traded. However, common shares can easily be traded on the stock market. During the life cycle of preference shares, shareholders receive dividends, but upon maturity, they receive back their principal amount.

Features of Preference Shares

1. Fixed-rate of Dividend:

Prior to paying dividends to equity shareholders, preference shareholders receive a fixed dividend rate. Preference shares determine whether shareholders receive dividends each year.

Shareholders of preference shares get a preference over common shareholders, making preference shares an attractive source of fixed income in the form of dividends. Learn how to generate passive income from dividends:

1. No Security:

There is no security offered against preference shares by companies. Preference share capital is part of the owner’s fund capital. It means no collateral is taken or given by the company.

1. Voting Rights:

Preference shareholders are not entitled to vote under general conditions.

Preference shareholders, however, are entitled to vote if dividends have been paid for less than two years.

1. Hybrid Security:

Due to the fact that preference shares have features of both equity and debentures, they are referred to as hybrid securities.

Some preference shares receive dividends only when a company earns profits, and like debentures, preference shares get fixed returns.

Types of Preference Shares

1. Cumulative Preference Shares:

The shareholders of these preference shares receive dividends each year regardless of whether the company makes enough profit.

It is possible that a company will incur losses during a particular year and will not be able to pay dividends to its shareholders.In such cases, the company will pay the accumulated dividends to preference shareholders in subsequent years.

1. Non-Cumulative Preference Shares:

Preference shares are entitled to dividends over common shares, if the company is in a position to distribute dividends.

The arrears will not be carried forward in the event that the company incurs losses during a particular year and cannot pay dividends to its shareholders.

1. Convertible Preference Shares:

This is the type of preference share that can be converted into common shares after a set period of time. A period after which the shares will be converted into common shares is specified in the terms and conditions.

As soon as the shares are converted to ordinary shares, the shareholders will become common shareholders, and they will no longer receive fixed dividends every year, but will enjoy all the benefits of ordinary shareholders.

1. Non-Convertible Preference Shares:

The fixed maturity period of preference shares cannot be extended and they cannot be converted into common shares. If the company is able to pay dividends to such shareholders, they receive them first.

1. Redeemable Preference Shares:

In this case, the company redeems these shares once their maturity period has expired.

The company can redeem redeemable shares upon maturity. As the shares reach maturity, they are divided among the shareholders and then redeemed at a predetermined price by the company.

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