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Types of Preference Shares

Preference shares mean those shares that give preference shareholders a preferential right receive dividends before equity shareholders. A company issues different types of preference shares such as cumulative and non-cumulative, convertible and non-convertible shares, and so on depending upon their requirements.<br>

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Types of Preference Shares

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  1. Types of Preference Shares

  2. Table of Content • What is Preference Share? • Methods of selling preference shares • Features of Preference Shares • Types of Preference Shares • Cumulative Preference Shares • Non-Cumulative Preference Shares • Convertible Preference Shares • Non-Convertible Preference Shares • Redeemable Preference Shares • Non-Redeemable/Irredeemable preference Shares • Callable Preference Shares • Adjustable-Rate Preference Shares • Participative Preference Shares

  3. What is Preference Share? Preference shares means those shares that give priority to individual shareholders over equity/common shareholders in concern to dividends and in company assets in case the situation of liquidation arises. Who are the Preference shareholders? Preference shareholders are generally Big Investors, Mutual Funds, or Big Financial Institutions because these preference shares are only issued by the company only when the company required a large number of funds in less time. Preference shareholders are not allowed to sell their shares in the stock market. As equity share preference shares come up with the maturity period and shareholders get dividends during the lifecycle of those shares. Upon maturity, preference shareholders get their principal amount back.

  4. Methods of selling preference shares Preference share can be sold by these two method only: • Call Feature: In call Back option the company will buy back their preference shares from the existing shareholder at a pre-determined price • Convertible Feature: In Convertible preference shares the shares are automatically gets converted into common shares after a fixed period of time. Learn how to select stocks that will give you high returns in the stock market with Technical Analysis Course

  5. Features of Preference shares • Fixed-rate of dividend: Preference shareholders gets priority over common/equity shareholders in payment of dividend at a fixed rate. • No Security: Against preference shares companies do not provide any kind of securities. The preference share capital is the part of the owner’s fund capital. It means no collateral is taken or given by the company. • Voting Right: Similar to common/equity shareholders, preference shareholders also do not get any voting rights but in case the dividends are not paid for two or more than two years in that condition the preference shareholders get Voting Rights. • Hybrid Security: Preference shares are called hybrid securities, as these shares have the features of equity shares as well as debentures.

  6. Types of Preference Shares 1). Cumulative Preference Shares 2). Non-Cumulative Preference Shares 3). Convertible Preference Shares 4). Non-Convertible Preference Shares 5). Redeemable Preference Shares 6). Non-Redeemable/Irredeemable preference Shares 7). Callable Preference Shares 8). Adjustable-Rate Preference Shares 9). Participative Preference Shares

  7. 1). Cumulative Preference Shares • In Cumulative Preference Shares, the shareholder are entitled to receive dividends every year irrespective that the company is earning profits or not. • In case, the company is bearing losses in a particular year and is unable to pay dividend to its shareholders. In such cases, the company will pay accumulated dividends to its shareholders in the subsequent years as arrears. 2). Non-Cumulative Preference Shares • In Non-Cumulative Preference Shares, shareholders receive dividends over common shareholders if the company is in a position to give dividends. • In case, if the company is bearing losses in a particular year and is unable to pay dividend to its shareholders. In such cases, the arrears will not be carried forward to the subsequent years.

  8. 3). Convertible Preference Shares • These are the type of shares that can be converted into common shares after a fixed period of time. This fixed period is pre-determined in the terms and conditions. • After the conversion of the preference shares into equity shares, the shareholder will not get the fixed dividends that they used to get every year and will enjoy the benefits of common shares. 4). Non-Convertible Preference Shares • These types of shares will not get converted into common/equity shares and after completing of the maturity period, these preference shares are bought back by the company. • Such shareholders have preferred dividend payments over common shareholders if the company is in a position to do so.

  9. 5). Redeemable Preference Shares • Redeemable Preference Shares are the type of shares that are redeemable by the company once their maturity period is over. • The shareholder will receive the dividend till the maturity period of these shares and after maturity period the company will redeem these shares at a pre-determined price. 6). Non-Redeemable/Irredeemable preference Shares • These types of shares do not have the maturity period and shareholder will not get any principal amount back on such shares. Learn stock market Trading with Top stock market courses

  10. 7. Callable Preference Shares • These are the types of shares, which the company will buy back from the shareholders on or after a pre-determined date. • These callable shares are not same as redeemable shares, whereas callable shares can be called upon by the company at a predetermined date and price even before the maturity date as per the terms and conditions. 8). Adjustable-Rate Preference Shares • Adjustable-Rate Preference Shares are the type of shares in which shareholders do not get fixed dividends during their maturity and get returns based on the market rate. • Company issue these shares to save itself from interest rate risk. Post issuing the share, the companies gives dividend to shareholders on the basis of the market rate.

  11. 9). Participative Preference Shares • These are the shares that get additional benefits of common shareholders apart from those of preference shareholders. The additional benefits they get are: • Additional Dividends: In this case, when the company make good profits in a particular year and decides to share that profit with the shareholders in the form of additional dividends, then whatever additional dividends equity shareholders will get over the fixed rate given to preference shareholders. Preference shareholders will also get that additional dividend given to equity shareholders over them. • Liquidation Event: If in case the company come in stage of liquidation and there is any liquidation event in that case the preference shareholder will get their initial capital as well as shares from that of common shareholder’s share on a pro-rata basis.

  12. Conclusion On the other hand, most preference shareholders are concerned with the timely payment of dividends rather than the company’s growth. It is important to go through the terms and conditions of the type of preference shares that you are going for and whether or not it suits your requirements. Thank You StockDaddy The Complete Stock Learning Platform Learn Stock Market Trading and Investing with StockDaddy Website: https://www.stockdaddy.in

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