Preference Shares (Preferred Shares)

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Meaning and Definition

Preference shares (preferred shares) refer to the stock which proffers a specific dividend being paid prior to the payment of any dividends which are paid to the common shareholders. Moreover, in the event of liquidation, the preference shares take precedence over common stock. Akin to common shares, preference shares also signify partial ownership in a company but do not allow to vote. Besides, the dividend received from the preference shares is fixed and does not fluctuate even if the company is facing poor financial conditions.

Benefits of Owning Preference Shares

The key advantage of owning preference shares is that the investor enjoys the facility of a higher claim on the assets of the company as compared to common share holders. Preference shareholders are always the first ones to receive their dividends. Besides, if in any case, the company goes bankrupt, the preference shareholders are paid off prior to common shareholders. Moreover, the preference shares do not involve any risk of takeover as well as dilution of managerial control.

Types of Preference Shares

Generally, there are four types of preference shares which include cumulative preferred stock, participating preferred stock, non-cumulative preferred stock, and convertible preferred stock.

Preference Share Capital

A public issue of preference shares is, undoubtedly, helpful in raising long term funds in the form of capital. This is due to preference shares being cumulative in nature, which implies that the dividend payable in the year of loss can be carried over to the next year until the company has gained adequate profits to pay off the cumulative dividends. The preference shares’ rate of dividend is comparatively higher than that of debentures and loans. Moreover, nowadays, many of the preference shares feature a stipulation period at the end of which these funds have to be repaid.

Preference share capital can be addressed as an amalgam form of financing which includes few characteristics of equity capital in addition to some attributes of debt capital. The preference share dividend is similar to equity for being a non tax deductible payment. Simultaneously, it is similar to debt capital due to the fixed rate of dividend. 

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