Preference shares are those shares in the equity of a listed company that carry two preferential rights over other classes of shares.
First preferential right in respect of earning a fixed dividend which may consist of a fixed amount or at a fixed rate. This fixed dividend must be paid to the preference shareholders before the company can issue any dividends to its common shareholders.
Second preferential right as to repayment of capital in the case of winding up of the company in priority to other classes of shares.
However, the preference shareholders do not usually have any voting control over the affairs of the company, as do the common shareholders.
There are many types of preference shares present in the Indian stock market in accordance with the clause contained in the agreement at the time of their issue.
In this article
- The types of preference shares
- 1. Cumulative Preference shares
- 2. Non-Cumulative Preference shares
- 3. Participating Preference shares
- 4. Non-Participating Preference shares
- 5. Convertible Preference Shares
- 6. Non-convertible Preference Shares
- 7. Redeemable Preference Shares
- 8. Irredeemable Preference Shares
- 9. Callable Preference Shares
- 10. Adjustable Rate Preference Shares
- The Bottom Line
A preference share is called cumulative when the arrears of dividend are cumulative.
The dividend in non-cumulative preference shares is only payable out of the net profits of each year and is not allowed to accumulate to be paid out of the profits of the future years.
Participating preference shares are those shares where the issuing company is entitled to pay an increased dividend to the owners in addition to preference dividend at a fixed rate.
The holders of non- participating preference shares are entitled only to a fixed rate of dividend and do not have any share in the surplus profits.
Convertible preferred shares are the type of shares where the holder has the option to convert into the common share of the issuer company.
These preference shares do not carry the right of conversion into the company’s common shares.
The preference shares which can be redeemed after a fixed period or after giving a certain notice at any time at the will of the company, are called redeemable preference shares.
Irredeemable preference shares are of the nature of a permanent and perpetual liability which cannot be redeemed during the lifetime of the company.
This is an innovative type of preference share.
For the preference shares which are callable, the issuing company has the option to buy back the share at a prefixed price on or before a prefixed date.
In the case of adjustable rate preference shares, the rate of dividend is not fixed.
The rate is formulated based on current interest rates in the market.
11. Guaranteed Preference Shares
Holders of guaranteed preference shares carry the right of a fixed dividend even if the company makes no or insufficient income.
The Bottom Line
There are a lot of investment options available to those looking to make money in the stock market.
Though most investors probably think of common shares by issuers when they think of investing in stocks, preference shares can also be a lucrative investment vehicle – when available.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.