Preference Shares: Meaning, Types, Features

Preference shares commonly known as preferred stocks, are those shares that enable shareholders to receive dividends announced by the company before receiving to the equity shareholders.
If the company has decided to pay out its dividends to investors, preference shareholders are the first to receive payouts from the company.
Preference shares are released to raise capital for the company, which is known as preference share capital. If the company is going through a loss and winding up, the last payments will be made to preference shareholders before paying to equity shareholders.
Preference shares that can be easily converted into equity shares are known as convertible preference shares. Some preference shares also receive arrears of dividends, which are called cumulative preference shares.
In India, preference shares should be redeemed within 20 years of issuance, and these types of preference shares are called redeemable preference shares.
As per the Companies Act 2013, companies do not have any right to issue irredeemable preference shares in India.

There are nine different types of preference shares given below:

• Convertible Preference Shares
• Non-Convertible Preference Shares
• Redeemable Preference Shares
• Non-Redeemable Preference Shares
• Participating Preference Shares
• Non-Participating Preference Shares
• Cumulative Preference Shares
• Non-Cumulative Preference Shares
• Adjustable Preference Shares

Convertible Preference Shares

Convertible preference shares are those shares that can be easily converted into equity shares.

Non-Convertible Preference Shares

Non-Convertible preference shares are those shares that cannot be converted into equity shares.

Redeemable Preference Shares

Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.

Non-Redeemable Preference Shares

Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date. Non-redeemable preference shares help companies by acting as a lifesaver during times of inflation.

Participating Preference Shares

Participating preference shares help shareholders demand a part in the company’s surplus profit at the time of the company’s liquidation after the dividends have been paid to other shareholders.
However, these shareholders receive fixed dividends and get part of the surplus profit of the company along with equity shareholders.

Non-Participating Preference Shares

These shares do not benefit the shareholders the additional option of earning dividends from the surplus profits earned by the company, but they receive fixed dividends offered by the company.

Cumulative Preference Shares

Cumulative preference shares are those type of shares that gives shareholders the right to enjoy cumulative dividend payout by the company even if they are not making any profit.
These dividends will be counted as arrears in years when the company is not earning profit and will be paid on a cumulative basis the next year when the business generates profits.

Non - Cumulative Preference Shares

Non - Cumulative Preference Shares do not collect dividends in the form of arrears. In the case of these types of shares, the dividend payout takes place from the profits made by the company in the current year.
So if a company does not make any profit in a single year, then the shareholders will not receive any dividends for that year. Also, they cannot claim dividends in any future profit or year.

Adjustable Preference Shares

In the case of adjustable preference shares, the dividend rate is not fixed and is influenced by current market rates.

Several features of preference shares have made normal investors superior earners even during low phases of economic growth. The most attractive features of preference shares are given below:

• They Can Be Converted Into Common Stock

Preference shares can be easily converted into common stock. If a shareholder wants to change its holding position, they are converted into a predetermined number of preference stocks.
Some preference shares inform investors that they can be converted beyond a specific date, while others may require permission and approval from the company’s board of directors to be converted.

• Dividend Payouts

Preference shares allow shareholders to receive dividend payouts when other stockholders may receive dividends later or may not be receiving dividends.

• Dividend Preference

When it comes to dividends, preference shareholders have the major advantage of receiving dividends first compared to equity and other shareholders.

• Voting Rights

Preference shareholders are entitled to the right to vote in case of extraordinary events. However, this happens in only some cases. Generally, purchasing a company’s stock does not give one voting rights in the company’s management.

• Preference In Assets

While discussing a company’s assets in the case of liquidation, preference shareholders have priority over non-preferential shareholders.

• What Are Preference Shares?

Preference shares are known as preferred stocks, are those shares that enable shareholders to receive dividends announced by the company before receiving to the equity shareholders.
If the company has decided to pay out its dividends to investors, preference shareholders are the first to receive payouts from the company.

• What are Redeemable and Non-Redeemable preference shares?

Redeemable preference shares are those shares that can be repurchased or redeemed by the issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of inflation.
On the other hand, Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by the issuing company at a fixed date. Non-redeemable preference shares help companies by acting as a lifesaver during times of inflation.

• How can preference shares be converted into common stock?

Preference shares can be converted into common stock if a shareholder wants to change its holding position, they are converted into a predetermined number of preference stocks.
Some preference shares inform investors that they can be converted beyond a specific date, while others may require permission and approval from the company’s board of directors to be converted.

Final Thoughts

Preference shares are a good way to earn a respectable position in a company’s group of shareholders. If the company sees liquidity in stocks, in that case, preference shareholders will get the major advantages of claiming dividend payments.