What are Preference Shares?

19 Feb 20256 minutes read
What are Preference Shares?

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Preference Shares Overview

What Are the Types of Preference Shares?

Features of Preference Shares

Advantages and Disadvantages of Preference Shares

Conclusion 

Preference shares are a type of equity share that gives certain preferences to investors. These shares differ from common stocks because they offer priority in receiving dividends and repayment in case of liquidation. But they don’t usually come with voting rights. This blog will explain everything you need to know about preference shares, including their types, features, pros, and cons. Whether you’re a beginner or looking to understand them better, this guide will help you make informed decisions.

Preference Shares Overview

Preference shares are a class of shares that provide shareholders with certain preferential rights over ordinary shareholders. These rights often include receiving dividends before ordinary shareholders and priority in case the company is liquidated. 

However, preference shareholders usually don’t have voting rights in the company’s decision-making processes. They are often seen as a safer option than ordinary shares, especially for those looking for stable income through dividends.

What Are the Types of Preference Shares?

Preference shares come in different types, each with its own features and benefits. Understanding these types can help investors choose the best option for their goals. Let’s take a look at the main types of preference shares:

1. Cumulative Preference Shares

  • These shares offer an advantage in case the company is unable to pay dividends in a given year. If dividends are missed, they accumulate and are paid in the future. 
  • So, if the company faces tough times, these unpaid dividends will be carried forward.

2. Non-Cumulative Preference Shares

  • Unlike cumulative shares, these do not accumulate missed dividends. If the company doesn’t pay dividends in one year, those dividends are lost forever. 
  • This type is more common in companies with stable income and less risk.

3. Convertible Preference Shares

  • These shares can be transformed into common equity shares once a certain period has passed or specific conditions are fulfilled.
  • This gives investors the option to turn their preference shares into regular shares, which could potentially offer higher returns if the company grows.

4. Non-Convertible Preference Shares

  • These cannot be converted into common shares. Once an investor buys these shares, they remain as preference shares for the entire term. 
  • They are best for people looking for fixed returns without the need for conversion.

5. Participating Preference Shares

  • Investors with participating preference shares can receive extra profits if the company does well. 
  • After the fixed dividends are paid, they may also share in the company’s additional profits, which makes them more attractive during good financial years.

6. Non-Participating Preference Shares

  • With these shares, the investor only gets a fixed dividend. There is no additional profit-sharing, even if the company earns more than expected. 
  • This type is more common in businesses that want to keep their profits within the company.
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Features of Preference Shares

Preference shares have several unique features that set them apart from ordinary shares. Here are the main features that make them attractive to investors:

1. Fixed Dividend

Preference shares usually come with a fixed dividend rate. This means investors receive a regular income, regardless of how well the company performs. This feature makes them appealing to people looking for stability in their earnings.

2. Priority in Payments

In case a company faces financial trouble and is liquidated, preference shareholders are paid before common shareholders. They have priority when it comes to receiving the remaining funds, which adds an extra layer of security.

3. No Voting Rights

Preference shareholders generally don’t have the right to vote at annual meetings or in company decisions. This is one of the key differences between preference and common shares. The focus for preference shareholders is mainly on receiving dividends rather than having a say in company operations.

4. Redeemable or Non-Redeemable

Some preference shares can be redeemed by the company before the set maturity date. This means the company can buy back the shares. If the shares are non-redeemable, they remain in the investor’s possession until maturity.

Also Read: What is Buyback in Share Market​: Why Companies Do it

Advantages and Disadvantages of Preference Shares

Preference shares come with a mix of benefits and drawbacks. To help you understand them clearly, here are the main advantages and disadvantages:

AdvantagesDisadvantages
Preference shares offer regular income through fixed dividends, which is ideal for those looking for stable returns.Preference shareholders usually cannot vote on company matters, limiting their involvement in company decisions.
In case of liquidation, preference shareholders are paid before common shareholders, reducing investment risk.It typically doesn’t offer capital gains like common shares, as they are mainly for stable returns.
Because of their priority in payments, preference shares are less risky compared to common shares, especially in tough times.If a company faces financial trouble, dividends might be missed, particularly with non-cumulative preference shares.
Some preference shares can be converted into common shares, allowing investors to benefit from potential company growth.It offers fixed returns, which may not keep up with market growth, unlike equity shares.
Ideal for investors seeking regular, steady income, as dividends are paid out before those for common shares.If interest rates rise, the fixed dividend can become less attractive compared to other investment options.

Conclusion 

Preference shares are a great investment option for those looking for stable returns with less risk. They come in a variety of types, each offering different benefits and drawbacks. Depending on your financial goals, they can complement your investment portfolio, especially if you prefer regular income over capital gains. While they provide security and stability, it’s important to understand the limits, such as the lack of voting rights and limited growth potential. Always do thorough research before investing in any financial instrument.

Dhakchanamoorthy S

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