Preference Share Meaning
Preference shares, also known as preferred stock, is an exclusive share option which enables shareholders to receive dividends announced by the company before the equity shareholders.
Preference shares provide the shareholders with the special right to claim dividends during the company lifetime, and also with the option to claim repayment of capital, in case of the wind up of the company.
It is considered as a hybrid security option as it represents the characteristics of both debt and equity investments.
The capital raised by issuing preference shares is known as preference share capital and preference shareholders can be regarded as owners of the company. They however do not enjoy any kind of voting rights, unlike equity shareholders.
Features of Preference Shares
The following are the features of preference shares:
- Preferential dividend option for shareholders.
- Preference shareholders do not have the right to vote.
- Shareholders have a right to claim the assets in case of a wind up of the company.
- Fixed dividend payout for shareholders, irrespective of profit earned.
- Acts as a source of hybrid financing.
Types of Preference Shares
The various types of preference share are discussed below:
- Cumulative preference share: Cumulative preference shares are a special type of shares that entitles the shareholders to enjoy cumulative dividend payout at times when a company is not making profits. These dividends will be counted as arrears in years when the company is not earning profit and will be paid on a cumulative basis, the next year when the business generates profits.
- Non-cumulative preference shares: These types of shares do not accumulate dividends in the form of arrears. In the case of non-cumulative preference shares, the dividend payout takes place from the profits made by the company in the current year. If there is a year in which the company doesn’t make any profit, then the shareholders are not paid any dividends for that year and they cannot claim for dividends in any future profit year.
- Participating preference shares: These types of shares allow the shareholders to demand a part in the surplus profit of the company at the event of liquidation of the company after the dividends have been paid to the other shareholders. In other words, these shareholders enjoy fixed dividends and also share a part of the surplus profit of the company along with equity shareholders.
- Non-participating preference shares: These shares do not yield the shareholders the additional option of earning dividends from the surplus profits earned by the company. In this case, the shareholders receive only the fixed dividend.
- Redeemable Preference Shares: Redeemable preference shares are shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.
- Non-redeemable Preference Shares: Non-redeemable preference shares are those shares that cannot be redeemed during the entire lifetime of the company. In other words, these shares can only be redeemed at the time of winding up of the company.
- Convertible Preference Shares: Convertible preference shares are a type of shares that enables the shareholders to convert their preference shares into equity shares at a fixed rate, after the expiry of a specified period as mentioned in the memorandum.
- Non-convertible Preference Shares: These type of preference shares cannot be converted into equity shares. These shares will only get fixed dividend payout and also enjoy preferential dividend payout during the dissolution of a company.
This concludes the topic of Preference Shares – Meaning, Features and Types. This topic is regarded as an important topic from the students perspective. For more such informative articles on topics of Business Studies for Commerce, stay tuned to BYJU’S.