Preference shares, also known as preferred stock, are shares of a companys stock with dividends that are paid out to shareholders before common stock dividends are paid out. They are a type of equity share where investors are paid fixed-rate dividends irrespective of the companys revenue earnings. Preference shares are held by preference shareholders who are given priority over other equity shareholders in terms of the payment of dividends. 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 guarantees that if the company fails to pay dividends in any year, the missed payments will accumulate and be paid out before any dividends are paid to common shareholders. Non-cumulative preferred stock does not offer this guarantee. Participating preferred stock allows shareholders to receive additional dividends beyond the fixed rate if the company exceeds certain financial targets. Convertible preferred stock can be converted into common stock 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. Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date.
In summary, preference shares are a type of equity share that offer fixed-rate dividends and priority over other equity shareholders in terms of the payment of dividends. They come in different types, including cumulative, non-cumulative, participating, and convertible preferred stock. Preference shares are ideal for risk-averse investors and they are callable.
