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Preference Shares

Reviewed by Bhavana | Updated on Sep 30, 2020

Catalogue

Introduction

Preference shares are often referred to as preferred stock. They are shares that belong to a company's stock with dividends that are paid to shareholders before the issuing of common stock dividends. If the company enlists for bankruptcy, preferred shareholders are entitled to be paid before common shareholders from company assets.

Most of the preferred shares have a fixed dividend, whereas common stocks do not. Typically, preferred shareholders also have no voting rights, but usually, common shareholders do. Preference shares come under four sections: convertible preferred stock, cumulative preferred stock, non-cumulative preferred stock, and participating preferred stock.

The cumulative preferred stock comprises a provision requiring the company to pay all dividends to shareholders, inclusive of those that were excluded in the past before their dividend payments can be received by common shareholders. These payments for dividends are guaranteed, but not always paid out when due.

Understanding Preference Shares

The moniker "dividends in arrears" is assigned unpaid dividends and must legally go to the current stock owner when payment is made. At times the holder of this type of preferred stock is awarded additional compensation (interest).

No missing or delayed dividends are issued by non-cumulative preferred stock. If a company decides not to pay dividends in any given year, the non-cumulative preferred stock owners have no right or power to claim those forgiven dividends in the future at any time.

Participating preferred stock grants the owners, the right to receive dividends equal to the commonly agreed rate of chosen dividends, plus an added dividend dependent on a defined condition.

Convertible preferred shares include an option that enables shareholders to convert their preferred shares into a set number of common shares, usually at any time after a pre-established date. In normal circumstances, on the request of the owner, convertible preferred shares are thus exchanged.

Preference shares (preferred shares) are corporate shares with dividends paid to shareholders before the dividends of common shares are paid out. Four types of preferred stock are available-cumulative (guaranteed), non-cumulative, participating, and convertible.

For risk-averse investors, preferential shares are ideal and are callable (the issuer can redeem them at any time).

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