An Introduction to Preference Shares

A corporation’s shares are units of equity ownership. Shares exist as a financial asset for some companies, allowing for an equitable distribution of any leftover profits, if any, in the form of dividends. Shareholders of a stock that does not pay dividends are not entitled to profit distribution. Instead, they expect to benefit from rising stock prices as the company’s profits rise.

What do Shares signify?

A corporation’s or financial asset’s shares signify equity ownership. 

What are the different types of Shares?

Variable types of shares can be distributed with different ownership, conditions, and rights when a limited corporation has numerous shareholders with varying amounts of money invested. These are usually:

1. Ordinary Shares
2. Non-voting shares
3. Preference Shares
4. Redeemable Shares 

So, now that we know what the basic four different types of Shares are, today, we are going to learn about Preference Shares. 

Preference Shares

Preference shares, also known as preferred stock, are shares of a company’s stock that pay dividends to shareholders before common stock payments are paid out. Preferred investors are entitled to be paid from corporate assets before common stockholders if the firm goes bankrupt.

The majority of preference shares have a fixed dividend, whereas common equities do not. Preferred stockholders normally do not have voting rights, but regular stockholders do.

Types of Preference Shares

There are nine different types of Preference Shares. They are as follows:

1. Convertible Preference Shares – Convertible preference shares are ones that can be converted into equity shares with ease. Preference shares are a type of stock that gives investors a competitive advantage over common stockholders. Even more unique are convertible preference shares. They allow holders the opportunity (right) to convert preference shares into common stock at a predetermined price after a certain length of time. They can be classified as hybrid securities because they combine the characteristics of both preference and common shares. Convertible Shares, on the other hand, can only be converted once.

1. Non-Convertible Preference Shares – Preference shares that cannot be converted into equity shares are known as non-convertible preference shares. As a result, they’re known as redeemable preference shares. Holders of such shares do not have the right to receive equity shares at the end of their term. After compensating the equity shareholders, such shares have the right to partake in any further profits.

1. Cumulative Preference Shares – Cumulative preference shares have all of the advantages and benefits of regular preference shares, including greater dividend distributions, dividend payment priority, and payment preference over equity shares upon a company’s liquidation. Cumulative preference shares, in a nutshell, are standard preference shares with an added benefit. The additional benefit is that the holders of these shares are entitled to dividends even if the issuing business has previously failed to pay them.

For a variety of reasons, businesses may be unable to earn profits at times. Due to the lack of revenues, they may be forced to pay no dividends for a period of time or pay only a percentage of the profits as dividends. Even in this situation, cumulative preference shareholders, unlike equity shareholders, have the right to collect dividends.

1. Non-cumulative Preference Shares – Unlike equity shares, holders of these shares receive a fixed rate of dividend and have a greater priority when it comes to dividend payment and firm liquidation.

Holders of non-cumulative preference shares, on the other hand, effectively forfeit their claim on unpaid dividends if the issuing business misses or fails to pay the promised dividends. This practically indicates that non-cumulative preference shareholders are not entitled to any dividend arrears for unpaid years in the past and that if a dividend payment is not made, the situation will remain unchanged.

1. Redeemable Preference Shares – Redeemable preference shares are those shares in which the issuer has the right to redeem the shares within 20 years of issuance at a predetermined price specified in the prospectus at the time of issuance, and before redeeming such shares, the issuer must ensure that redeemable preference shares are paid up in full and that all the conditions specified at the time of issuance are met.

1. Non-redeemable Preference Shares – Preference that cannot be redeemed Shares are a sort of preferred stock that does not include a call feature. These are shares that cannot be redeemed during the company’s lifetime and can only be obtained at the time of asset liquidation (winding up). As a result, non-redeemable preference shares are often preferable to redeemable preference shares. However, it’s possible that buyback clauses in the company’s shareholders agreement will apply to such shares. Investors are better protected with these shares than with redeemable preferred shares.

1. Participating Preference Shares – Participating preference shares allow shareholders to demand a portion of the company’s surplus profit after dividends have been paid to other shareholders at the time of the company’s demise. These shareholders, however, get set dividends and partake in the company’s surplus profit alongside equity stockholders.
2. Non-participating Preference Shares – These shares do not benefit the shareholders with the additional option of earning dividends from the surplus profits earned by the company, but they receive fixed dividends offered by the company. 

1. Adjustable Preference Shares – The dividend rate in adjustable preference shares is not fixed and is affected by current market rates.

Conclusion:

Preference shares are an excellent technique to gain respect among a company’s shareholders. If the company sees a lot of liquidity in the stock market, preference shareholders will get a lot of dividend payments.