Preference Shares: Meaning, Features, And Types

Preference Shares: Meaning, Features, And Types

The meaning of preference shares refers to the type of share that grants shareholders certain preferences and advantages. In essence, preference shares give investors the privilege of receiving dividends before common equity shareholders. Simply put, preferred shares meaning, it is when a company decides to distribute dividends; preference shareholders are the first to receive their shares.

Moreover, the meaning of preference shares can be understood by recognising their key features. One important feature is that preference shareholders have a preference for assets. This means that they have a higher claim over non-preference shareholders when claiming the company's assets in the event of liquidation.

Understanding what preference shares and their preferred shares mean allows investors to make informed decisions in the share market. So, in this article, we will understand in detail what preference shares are, their features and their types.

What Are Preference Shares?

Preferred shares meaning refers to stocks that enable shareholders to take advantage of dividends before the company pays out to equity investors. When a company decides to pay dividends to investors, preference shareholders get paid first.

In preference share capital, preference shares are released to raise capital for the company. During a loss, preference shareholders will receive their dividends before equity shareholders.

Moreover, the convertible preference shares definition refers to the preference shares that can be easily converted into equity shares. A type of preference share that gets arrears of dividends is called a cumulative preference share.

The Indian government requires preference shares to be redeemed within 20 years of issuance. These are called redeemable preference shares. According to the Companies Act 2013, companies can't issue irredeemable preference shares in India. After understanding the preferred shared meaning, let’s explore their features.

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Table of Content

  1. What Are Preference Shares?
  2. Preference Shares Features
  3. Types Of Preference Shares
  4. Conclusion

Preference Shares Features

Normal investors can earn more even during slow economic times with preference shares because of several features. There are a few things you'll like about preference shares:

A Preference For Assets

A preference shareholder gets priority over a non-preference shareholder when it comes to claiming the company's assets after a liquidation.

Dividend Payouts

Preferred shares give holders dividend payouts in situations where other stockholders don't get dividends or get dividends later. It depends on the benchmark interest rate whether the payouts are fixed or floating.

Preference For Dividends

Shareholders with preference shares get dividends first - or on priority - compared to other stockholders.

Voting Rights

In some cases, preference shareholders get to vote if something extraordinary happens. In general, purchasing shares in a company does not grant one the right to vote for the company's management.

Convertibility

A preference share can also be converted into a common share. When one wishes to change their holding position, they are typically converted into a predetermined number of non-preference stocks. It is possible to convert preference shares beyond a specific date on some, while on others, the company's board of directors must approve the conversion.

Callability

The issuer may also call or repurchase preference shares at some point in the foreseeable future. In the same way as being converted, one may reissue their preference shares at a certain future date.

Types Of Preference Shares

After understanding the meaning of preference shares and their features, let’s explore the nine types of preference shares:

Convertible Preference Shares

A convertible preference share is one that can be easily converted into an equity share.

Non-Convertible Preference Shares

Preference shares that are not convertible into equity shares are called non-convertible preference shares.

Redeemable Preference Shares

It is a type of share that can be repurchased or redeemed by the issuing company at a fixed rate and date. During inflationary times, these shares provide a cushion for the company.

Non-Redeemable Preference Shares

Preference shares that cannot be redeemed or repurchased by the issuing company at a fixed date are called non-redeemable preference shares. 

Participating Preference Shares

At the time of a company's liquidation, participating preference shares allow shareholders to claim their share of the surplus profit after dividends have been paid to other shareholders.
Fixed dividends are paid to these shareholders, and they share in the company's surplus profits with equity investors.

Non-Participating Preference Shares

Shareholders who own these shares are not able to earn dividends from the company's surplus profits, but they do receive fixed dividends.

Cumulative Preference Shares

Shares with cumulative preference give shareholders the right to receive cumulative dividends even if they do not make a profit. In years when the company is not earning profits, dividends will be counted as arrears and will be paid on a cumulative basis the next year.

Non - Cumulative Preference Shares

Dividends are not collected as arrears on non-cumulative preference shares. These types of shares pay dividends based on the company's profits for the current year. As a result, if a company doesn't make any profit in a particular year, its shareholders won't receive any dividends. Additionally, they cannot claim dividends in the future.

Adjustable Preference Shares

With adjustable preference shares, the dividend rate is not fixed and is affected by market conditions.

Conclusion

In the world of investing, preference shares offer investors certain advantages. They give shareholders priority to receive dividends before common equity shareholders. A preference shareholder has a higher claim on assets when a company is liquidated than non-preference shareholders.

Moreover, with the blinkX share market app, investors can stay up-to-date on the share market and make informed investments. The app provides real-time market data, and analysis, enabling investors to monitor their investments.

Preference Shares FAQs

A preference shares definition refers to the share that pays dividends to shareholders before common stock dividends are paid. During a bankruptcy, preferred stockholders will get paid before common stockholders.

Preferred shareholders get dividends before common shareholders because they get priority over a company's income. When it comes to company assets, common stockholders are last in line, so they get paid after creditors, bondholders, and preferred shareholders.

Shareholders can convert preference shares into common stock if they want to change their holding position. They're converted into a predetermined number of preference shares. Certain preference shares can be converted beyond a certain date, while others require the board's approval.

Preferred shares are safe bets since they are issued by companies in the banking and financial sector, which are less likely to default than other companies.

You should buy preferred stock when interest rates are low. In low-interest rates, preferred stock's par value rises, so they pay out more.