Preference Shares

Preference shares are one of the two kinds of shares which a company can issue, other being equity share or ordinary share. The Preference shares have preferential right to receive dividend at a fixed rate before any dividend is paid on the equity shares. When the company is wound up, preference shares have a right to return of the capital before that of equity shares. Further, preference shares may carry some more rights such as the right to participate in excess profits which a specified dividend has been paid on the equity shares or the right to receive a premium at the time of redemption.

Difference between Preference Shares and Equity Shares

Following table shows the key difference between Preference Shares and Equity Shares. For further explanation, please visit this link.

Types of Preference Shares

When we buy shares, we do not invest in the stock market itself but in the equity shares of a company. That makes us a shareholder or part-owner in the company. This means that we own part of the assets of the company, and we are entitled to a share in the profits these assets generate. A company may keep a fraction of profit generated within it. This will be utilised to buy new machinery or more raw material or to reduce its loan with the bank. It distributes the other fraction as dividend.

Cumulative Preference Shares

When we buy equity shares or ordinary shares, we are not automatically entitled to a dividend every year.  The dividend will be paid only if the company makes a profit and declares a dividend. But that is not the case with the preference shares. A preference shareholder is entitled to a dividend every year. Please note that it may be possible that a company doesn’t have the money to pay dividends on preference shares in a particular year. The dividend is then added to the next year’s dividend. If the company can’t pay it the next year as well, the dividend keeps getting added until the company can pay. These are known as cumulative preference shares. Thus, cumulative preference shares are those preference shares, the holders of which are entitled to recover the arrears of preference dividend, before any dividend is paid on equity shares.

Non-cumulative Preference Shares

Some preference shares are non-cumulative — if the company can’t pay the dividend for one particular year, the dividend for that year lapses. If the company does not declare a dividend in any year due to any reason, such shareholders get nothing nor they can claim unpaid dividend of any year in any subsequent year.

Participating Preference Shares

They have fixed preference dividend and also a right to participate in surplus profits after a dividend is paid.

Non-Participating Preference Shares

Such shares get only a fixed rate of dividend every year and there is no right to participate in the surplus profits.

Convertible Preference Shares

Holders of these shares have right to get their preference shares to be converted into equity shares (but not debentures or other debt securities)

Non-Convertible Preference Shares

Holders of these shares have no right of getting their preference shares converted into equity shares