Types of Preference Share

What Are The Different Types Of Preference Shares?

Based upon the structure and classification, preference shares are divided into various forms. A company can simultaneously issue multiple kinds of Preference shares in the market. This usually depends on the demands of the investors or the needs of the company. The types of Preference shares are as follows:

• Non-cumulative preference shares 

The shares that cannot accumulate dividends are known as non-cumulative preference shares. The shareholders of the non-cumulative preference shares are paid the assigned amount from the current year’s net profit. 

• Cumulative preference shares

When a company cannot pay the decided amount of shares in a year to the dividends then they can pay the cumulative dividends in the following year. 

• Participating preference shares 

The shareholder having this share can take part in the surplus profit during the liquidation once the company has completely paid its other shareholders. Additionally, they will get their extended dividends also. 

• Redeemable preference shares 

This kind of preference share is also known as callable preferred stock. They are considered as one of the most effective ways to finance big companies and organizations. The shares are made by combining equity and debt financing. These shares are traded on the stock exchange. 

• Non-participating shares 

Non-participating shares are those that cannot entitle the shareholder to pay any surplus profit but offer them the decided dividends. 

• Adjustable shares 

Adjustable shares are those in which the rate of dividends is not fixed properly and it gets influenced by the prevailing market rates. 

• Irredeemable preference shares 

This kind of preference shares cannot be repaid during the active lifetime of the company. The shareholders must wait until the company decides to wind its current practice and operations. Irredeemable shares are the perpetual liability for the company. 

Now let us discuss the exact meaning of preference shares to get in-depth knowledge related to the topic. 

What Are Preference Shares?

Preference shares or stocks enjoy a preferential right when the distribution of dividends takes place during the liquidation of the company. The shareholders of the preferred stocks are given more importance as compared to the other shareholders of the company. During the liquidation of the company, proper opinions must be taken from all the shareholders including the preference shareholders, other shareholders, etc. 

Benefits of Preference Shares

For Investors

• Preference shares are named so because they are also known as preferred stock, i.e. the shares that receive dividends before the common stock shareholders. 
• Preference shares are very convenient for people who do not wish to take such risks or long term investments as they can be redeemed at any given time without any hassle. 
• There is a regular and fixed income in Preference shares so it appeals to investors who want a trustworthy income source. 

For the Company

• The rate of dividend on Preference shares is fixed, so even if the company makes more profit, the Preference shareholders don’t have to be paid extra. 
• Preference shareholders do not have voting rights or any ownership over the company, thus they do not interfere with managerial decisions. 
• A variety of kinds of Preference shares can be issued for any company. This can be based on the wants of the investors or the needs of the company. 

Conclusion 

Preference shares or stock are preferred by most companies and organisations. There are different types of preference shares in India such as cumulative shares, non-cumulative shares, adjustable shares, including many more. Investors can choose the best-suited shares according to their choice and comfort.