CandleFocus

Preference Shares

Preference Shares, also known as preferred stock, are a form of corporate equity that provide shareholders with a preferential right to dividends and other company shares. Preference shares are different from common stock in that it provides shareholders with priority over regular shareholders when it comes to dividend payments.

Preference stocks also typically have a fixed dividend rate and a limited voting right, meaning they don’t have too much of an impact on the company’s operating decisions.The value of the share may be redeemed at the discretion of the issuer, with or without prior notice to the investor.

There are four different types of Preference Shares available to investors. These are cumulative, non-cumulative, participating and convertible.

Cumulative Preference Shares guarantee the payment of dividends. This means that if the company doesn't pay the dividend in a given year, the company is obligated to pay the missed dividend in full before paying dividends to other shareholders. This means that there is a greater security for the cumulative preference shareholder.

Non-Cumulative Preference Shares do not guarantee the payment of dividends. This means that if the company does not pay the dividend for any given year, it does not have to pay the missed dividend in the future. These are less secure for investors, because there is no guarantee of return on the investors’ money.

Participating Preference Shares have cumulative characteristics, but the investors can also receive more than the fixed dividend rate if the company’s profits are strong.

Convertible Preference Shares are a hybrid between Preference Stock and Common Stock. The holders are able to convert their preference shares into common shares at a predetermined price. This allows investors to benefit from the dividends offered by preference stock while also having the potential to benefit from the upside of common stock in the event that the company performs well.

Preference shares are often seen as a safer form of stock than common stock, since they are entitled to a fixed dividend rate that is paid out before common stock dividends are paid. This makes them an ideal choice for investors who are looking for a more secure long-term investment. On the downside, since they typically have a limited voting right and a callable feature, investors have little to no say in the company’s operations, and the issuer can redeem the shares at any time.

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