What is Preference Share?

What is Preference Share?

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Preferred shares are a unique class of shares where dividends are distributed to shareholders before the investors holding common stock. Therefore, when it comes to profit sharing, preference shareholders have rights over common shareholders. Preference shareholders also have priority over common stock owners if the company files for bankruptcy. Preference shareholders have the same fixed dividend as common shareholders, but they are not entitled to vote. Preference shares are preferred by investors with significant experience in the stock market. Let’s explore what are preference shares in detail today. 

Features of Preference Shares

Normal investors can earn more even during slow economic times with preference shares because of several features. The following is the breakdown of some notable features of preference shares: 

A Preference For Assets

A preference shareholder gets priority over a non-preference shareholder while claiming the company's assets after a liquidation.

Dividend Payouts

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

Preference For Dividends

Shareholders with preference shares get dividends earlier compared to other stockholders.

Voting Rights

In general, purchasing preference shares in a company does not grant one the right to vote for the company's management. Preference shareholders may vote in certain extraordinary circumstances. 

Convertibility

A preference share addresses that they usually can be converted into a common share. It is possible to convert some shares after a specific date. For some 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 future. Moreover, one may reissue their preference shares at a certain future date.

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Table of Content

  1. Features of Preference Shares
  2. Types of Preference Shares

Types of Preference Shares

After understanding what is preference share and its features, let’s explore the nine types of preference shares.

1. Convertible Preference Shares

A convertible preference share can be easily converted into an equity share. It is possible for holders of these shares to convert their common shares into preferred shares. Investors who want to gain from an increase in common shares, as well as preferred share dividends, choose these shares.  

2. Non-Convertible Preference Shares

Non-convertible preference shares remain as preference shares throughout their lifetime. Holders cannot change them into regular company shares (equity shares). These shares offer fixed dividend payments but don't give investors a chance to benefit from the company's growth through stock value increases. Companies often issue these when they want to raise money without diluting ownership control. 

3. 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. This provides a clear exit path for investors. Companies find these useful when they need temporary funding.  

4. 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. The company has no obligation to buy these shares back from investors. These shares work well for companies seeking permanent capital without taking loans. 

5. 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.

6. 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.

7. Cumulative Preference Shares

Cumulative shares allow dividend payments to shareholders in arrears. Sometimes businesses face financial difficulties preventing the distribution of dividends. Dividends cannot be given to common shareholders unless they are paid to preference shareholders. In case this occurs, the company chooses to pay cumulative dividends next year.  

8. 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.  

9. Adjustable Preference Shares

When adjustable preferred shares are used, the number of shares is not fixed and is influenced by market conditions. This means that dividend rates are increased or decreased by specific market indicators such as interest rates, market developments, etc. This allows companies to gain flexibility in financial management.

Conclusion
Preference shares meaning suggests that it gives shareholders more priority for receiving dividends and offers investors an advantage. Investors holding preference shares get dividends before common equity shareholders. Understanding all the aspects related to preference shares may help investors make informed decisions. Moreover, with the BlinkX share market app, investors can stay updated on various shares and dividend payments, helping them make informed investments. The app provides real-time market data and analysis, enabling investors to monitor their investments.

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FAQs on What is Preference Shares

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 considered to be a safe investment because they are issued by companies that are listed on stock exchanges and follow certain guidelines set by both the exchange and market regulators.

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.

An OPC cannot issue preference shares or other convertible instruments because it only has one member. To issue them, the company must be converted to a public or private limited corporation.