Preference shares, also known as preferred stock, are a type of security that offers characteristics similar to both common shares and a fixed-income security. They are shares of a companys stock with dividends that are paid out to shareholders before common stock dividends are paid out. In exchange, preference shares often do not enjoy the same level of voting rights or upside participation as common shares. There are four main types of preference shares: cumulative preferred, non-cumulative preferred, participating preferred, and convertible preferred.
- Cumulative preferred stock: This type of preference share guarantees that if the company fails to pay dividends in any year, the missed payments will accumulate and must be paid out before any dividends are paid to common shareholders.
- Non-cumulative preferred stock: This type of preference share does not guarantee that missed dividend payments will accumulate.
- Participating preferred stock: This type of preference share allows shareholders to receive additional dividends beyond the fixed dividend rate if the company exceeds certain financial targets.
- Convertible preferred stock: This type of preference share can be converted into a predetermined number of common shares if a shareholder wants to change their holding position.
Preference shares are ideal for risk-averse investors and they are callable, which means the issuer can redeem them at any time. Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date, while non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date.
