What are Preference Shares?

Whenever we study about a company, we often come across the words equity shares and preference shares. In this article, we shall study about the Preference Shares.

What are Preference Shares?

Preference Shares are those shares that have higher priority in comparison to equity shares. The dividend is firstly paid to the preference shareholders and later to the equity shareholders. At the time of liquidation, capital is first paid to the preference shareholders and then to equity shareholders.

Let us now have a look at the features of Preference Shares.

Features of Preference Shares

·       Preference shareholders do not have any voting rights. But they can claim voting rights if they do not receive a dividend for two or more years on cumulative preference share and three or more years on non-cumulative preference shares.

·       Preference shareholders receive dividend only if the company has earned profits and board members propose to give a dividend.

·         Just like the debentures, the rate of dividend is fixed on preference shares.

·         Preference shares are a source of finance for the companies.

A company can issue different types of Preference Shares. Let us have a look at them.

Different Types of Preference Shares

·         Cumulative Preference Shares

·         Non-Cumulative Preference Shares

·         Redeemable Preference Shares

·         Non-Redeemable Preference Shares

·         Convertible Preference Shares

·         Non-Convertible Preference Shares

·         Participating Preference Shares

·         Non-Participating Preference Shares

Preference shares have many advantages; let us have a look at the advantages of preference shares.

Advantages of Preference Shares

·      Cautious investors get fixed rate of interest on preference shares. So investors who want regular income invest in preference shares.

·      Preference shares do not hold any voting right. So, the company can issue equity shares to raise capital without diluting the control of preference shareholders on the company.

·        Dividends are to be paid only if there are sufficient profits in the hands of the company.

·        No charge can be created on preference shares to raise capital for the company.

·       Since there are many different types of preference shares; the company has the flexibility to issue the type of preference shares that suits it the most.

Conclusion

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