What Are Preference Shares?

What Are Preference Shares?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Preference shares, also known as preferred stocks, are a type of shares which are issued by companies. Unlike common shares, preference shares provide shareholders with a fixed dividend. These dividends must be paid before dividends from common stocks are issued. Moreover, if a company is winding up or going bankrupt, preference shareholders have a prior claim on assets over common shareholders. However, unlike common shareholders, preference shareholders usually don’t have voting rights within the company.

Related Questions

1. What are the different types of preference shares?

There are several types of preference shares including cumulative preference shares, non-cumulative preference shares, participating preference shares, non-participating preference shares, convertible preference shares, and non-convertible preference shares. Each type comes with its own set of features and benefits.

2. What are cumulative preference shares?

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Cumulative preference shares are those in which if any amount of dividend is unpaid due to insufficient profits in any year, it will be accumulated and paid out in the future when sufficient profits are available.

3. What is the difference between preference shares and common shares?

The primary difference lies in the dividend payments and voting rights. Preference shareholders receive their dividends before common shareholders and have a prior claim on the company’s assets if it goes bankrupt. However, they usually don’t have voting rights in the company decisions, unlike common shareholders.

4. How do preference shares work?

Preference shares work by providing its holders with a fixed dividend, paid out before common stock dividends. If the company goes bankrupt, preference shareholders have a prior claim on remaining assets after creditors have been paid.

5. What are convertible preference shares?

Convertible preference shares are those that give the shareholder the option to convert their preference shares into a certain number of the company’s common shares after a predetermined period. This can be beneficial if the company’s common shares increase in value.