Preference shares are a special class of shares that combine features of both equity shares and debt instruments. They are commonly issued by companies to raise capital while offering investors a relatively stable income. Preference shareholders enjoy certain privileges over equity shareholders, especially in terms of dividend payments and repayment of capital, making these shares a popular choice for conservative investors seeking predictable returns.
Preference shares are shares that carry a preferential right over equity shares in two key aspects:
This means preference shareholders receive dividends before equity shareholders and are paid back first if the company winds up. However, unlike equity shareholders, preference shareholders usually do not have voting rights in company matters.
Cumulative preference shares allow unpaid dividends to accumulate if the company is unable to pay them in a particular year. These arrears of dividends must be paid in the future before any dividend is distributed to equity shareholders.
In the case of non-cumulative preference shares, dividends do not accumulate. If the company fails to declare dividends in a particular year, the shareholder loses the right to receive dividends for that year.
Participating preference shares provide shareholders with an additional benefit. Apart from fixed dividends, holders may also receive a share in surplus profits after equity shareholders receive their dividends.
These shares offer only a fixed rate of dividend. The shareholders do not participate in extra profits, even if the company performs exceptionally well.
Convertible preference shares can be converted into equity shares after a specified period or upon meeting certain conditions. This option allows investors to benefit from potential capital appreciation.
Non-convertible preference shares cannot be converted into equity shares. They remain preference shares throughout their tenure and provide fixed dividend income.
Redeemable preference shares are issued with an agreement that the company will buy them back after a specified period or on a predetermined date.
Irredeemable preference shares do not have a fixed redemption date. These are repaid only when the company is liquidated, subject to legal provisions.
Preference shares offer a fixed rate of dividend, which provides predictable income to investors regardless of fluctuations in company profits, subject to availability of distributable profits.
Preference shareholders receive dividends before equity shareholders, which reduces income-related uncertainty.
In case of liquidation, preference shareholders are repaid before equity shareholders, though after debenture holders and other creditors.
Generally, preference shareholders do not have voting rights, except in special circumstances such as non-payment of dividends for a specified period.
Due to fixed dividends and priority rights, preference shares are considered less risky than equity shares, though they still carry more risk than secured debt instruments.
Unlike equity shares, preference shares usually do not benefit significantly from company growth, as dividends are fixed and participation in profits is often restricted.
Preference shares serve as a balanced investment option for those who seek regular income with relatively lower risk than equity investments. While they may not offer high capital appreciation, their priority in dividends and capital repayment makes them an attractive choice for income-focused and risk-averse investors. Understanding the types and features of preference shares helps investors make informed decisions aligned with their financial goals.
Q1: What are preference shares?
Preference shares are company shares that offer priority in dividend payments and capital repayment over equity shares, usually with a fixed dividend rate.
Q2: Do preference shareholders get voting rights?
Generally, preference shareholders do not have voting rights, except in special situations such as non-payment of dividends for a long period.
Q3: Are preference shares safer than equity shares?
Yes, preference shares are considered safer than equity shares because they offer fixed dividends and priority in repayment, but they still carry some risk.
Q4: Can preference shares be converted into equity shares?
Only convertible preference shares can be converted into equity shares after a specific period or under defined conditions.
Q5: Who should invest in preference shares?
Preference shares are suitable for conservative investors who prefer steady income and lower risk rather than high capital appreciation.
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