What are preference shares & types of preference shares?
In stock markets, when you are referring the shares or stocks, there are one type of shares know as Preference shares. What are Preference shares will be discuss in this article.
Preference shares as the name suggests have certain preference when compared to other shares, especially when there is any dividend distribution. Preference shareholders are the first to receive the shares when a dividend is announced and only after them other shareholders will receive the dividend.
Preference shareholders have the right to claim the fixed percentage of the dividend before paying the dividend to the other shareholders. Only after the dividend for the preferential shareholders is paid then the dividend for the other shareholders will be decided. Preference shareholders even have the right to claim the repayment of the capital on wind up.
Features of preference shares:
Preference shares have a wide range of features as corporate emphasize a set of features while issuing them such as:
Dividends for preference shareholders
Preference shareholders have no right to vote in the annual general meeting of a company
These are a long-term source of finance
Dividend payable is generally higher than debenture interest
Right on assets when the company is liquidated
Par value of preference shares
Fixed-rate of dividend irrespective of the volume of profit gained
Preemptive right of preference shareholders
Hybrid security of preference shares because it also bears some characteristics of debentures
The dividend is not a tax-deductible expenditure
Shareholders also enjoy preferential right to receive a dividend
There are different types of preference shares. These are as listed below
Cumulative and Non-Cumulative preference shares
participating and Non Participating preference shares
Convertible and Non Convertible preference shares
Redeemable and Non Redeemable preferences shares
Cumulative and Non-Cumulative
Cumulative shares are those which are entitled to a fixed percentage of dividend even in times when the company is not making any profits. If a company is not making any profits then they will consider the dividend payment of that year as an arrear and will be carried forward to the next year. The cumulative areas are to be cleared first in the future before making any dividend payment to other shareholders. When the company makes profits, all the arrears accumulated in the past will be cleared first and from the remaining profits if any, the dividend payment to the other shareholders will be made.
But in the case of Non-Cumulative shares, the shareholders cannot claim the dividend if there are no profits for the company during that year. If the company has made some profits but the company has not announced the dividend, then they have the right to claim the dividend from the profits. There is no accumulation of arrears if there are no profits that are made by the company during the financial year.
participating and Non Participating
Participating type of shareholders has the right to participate in the company surplus during the liquidation of the company but only after the company has paid to all other shareholders of the company. They also have the right to claim the dividend along with all other shareholders of the company.
Where are when it comes to Non Participating preference shareholders, they do not have the right to participate in the surplus profits of the company. They only have the right to receive the stipulated dividend from the profits of the company and cannot participate in the surplus of the company.
Convertible and Non Convertible
Convertible means those shares which are convertible to the normal type of equity shares. Convertible shares are those shares that can be converted to the equity shared within the specified time period. The shareholders can covert the share into equity share at a stipulated time period.
Non Convertible shares are those which cannot be converted to equity shares. These shares can only be redeemed and cannot be converted to equity shares. The shareholders has to redeem the shares and have no right to get them converted to equity shares
Redeemable and Non Redeemable
Redeemable shares are those share which can be redeemed by the investor during a fixed period of time as specified by the company. The investor has to redeem those shared according to the time specified by the company.
Non Redeemable preference share are those shares which cannot be redeemed during the lifetime of the company.