Preference shares provide stakeholders preferential rights to a company's profits and assets. These shares rank above common shares but below bonds. Owners of preference shares receive regular fixed dividends and are prioritized during dividend distribution or bankruptcy. This added security makes preference shares more appealing than common shares.
Types of Preference Shares
Preference shares can be categorized into four types: cumulative, non-cumulative, participating, and convertible.
Cumulative preference shares guarantee dividend payment, even if the company misses some. If dividends are delayed, they are referred to as "dividends in arrears," and the stockholder may receive extra compensation.
Non-cumulative preference shareholders do not receive missed or unpaid dividends. They cannot claim unpaid dividends if the company decides not to distribute them in a certain year.
Participating preference shareholders receive dividends at a fixed rate plus an additional amount based on certain conditions. If the company goes bankrupt, they may recover the money paid for the stock and a share of the remaining funds for common shareholders.
Convertible preference shareholders can convert their shares into common shares, usually after a certain date. The value of these shares depends on the performance of the common stock.