What are Preference Shares?

What are Preference Shares?

Whenever we study about any company, we often come across the terms equity shares and preference shares. In this article we will study about Preference Shares.

What are preference shares?

Preference shares are shares which have a higher priority than equity shares. Dividends are paid first to preference shareholders and later to equity shareholders. At the time of liquidation, the capital is paid first to the preference shareholders and then to the equity shareholders.

Let us now take 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 dividends for two or more years on cumulative preference shares and for three or more years on non-cumulative preference shares.

•  Preference shareholders receive dividends only when the company has made profits and the board members propose to pay dividends.

•  Like debentures, the rate of dividend on preference shares is fixed.

•  Preference shares are a source of finance for companies.

A company can issue different types of Preference Shares. Let's take 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 take a look at the advantages of preference shares.

Benefits of preference shares

•  Vigilant investors get fixed interest rates on preference shares. Therefore investors who want regular income invest in preference shares.

•  Preference shares do not have any voting rights. Therefore, the company can issue equity shares to raise capital without diluting the control of preference shareholders over the company.

•  Dividend should be paid only when the company has sufficient profits in hand.

• No duty can be imposed on preference shares to raise capital for the company.

• Since there are many types of preference shares; The company has the flexibility to issue the type of preference shares that best suits it.

conclusion

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