Preference shares, also known as preferred stock, are a type of share that has certain rights and privileges over normal equity shares. These rights may differ based on the parameters specified in the company’s articles of association or offering agreements. Here are the most prevalent types of preference shares.
- Cumulative Preference Shares: These shares allow stockholders to receive unpaid dividends from prior years before they are given to common shareholders. If the corporation does not pay dividends in a given year, the unpaid balance accumulates and must be resolved in subsequent years before dividends are paid to common shareholders.
- Non-Cumulative Preference Shares: These shares do not accumulate unpaid dividends from prior years. If the firm fails to pay dividends in a given year, shareholders of non-cumulative preference shares lose their right to receive those dividends, and the corporation is under no duty to make up for the missed payments in future years.
- Participating Preference Shares: Participating preference shares allow shareholders to receive additional dividends beyond the fixed rate established in the offering documents. If the company’s profits exceed a specific threshold, participating preference shareholders, like common shareholders, may participate in the distribution of these excess profits, essentially sharing in the company’s success.
- Non-Participating Preference Shares: Non-participating preference shares do not allow stockholders to receive additional dividends beyond the fixed rate. After the fixed dividend is paid, any excess profits are allocated solely to common shareholders; non-participating preference owners do not receive these payments.
- Convertible Preference Shares: Shareholders can convert their preference shares into a fixed number of common shares of the issuing company at a set conversion ratio. This feature allows preference shareholders to share in the potential gain from the company’s stock price appreciation.
In conclusion, preference shares provide investors with personalized investing options based on their risk tolerance and preferences. Investors can make informed judgments about their investment portfolios and aims by understanding the various forms of preference shares, as well as their rights and advantages. Companies may issue preference shares to raise money while offering investors attractive dividends and other perks, resulting in a more diverse and balanced capital structure.
