Types of Preference Shares

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Preference shares, also known as preferred stock or preferred shares, are a type of equity security that has preferential rights compared to common shares. They usually provide a fixed dividend and have priority over common shares in terms of dividend payments and claims on the company’s assets in case of liquidation. There are several types of preference shares, which can be categorized based on their features and characteristics:

1. Cumulative Preference Shares: These shares have the right to receive any unpaid dividends accumulated over the years before any dividend is paid to common shareholders. If the company is unable to pay dividends in a particular year, the unpaid amount is carried forward and paid out in subsequent years when the company is able to do so.
2. Non-Cumulative Preference Shares: Unlike cumulative preference shares, non-cumulative preference shares do not accumulate unpaid dividends. If the company does not declare dividends in a particular year, these shareholders lose their right to receive dividends for that year.
3. Participating Preference Shares: These shares not only receive fixed dividends but also have the right to participate in additional profits after a specified portion has been distributed to common shareholders. This allows participating preference shareholders to potentially receive higher dividends in years when the company performs well.
4. Non-Participating Preference Shares: These shares receive a fixed dividend and do not have any additional rights to share in the company’s profits beyond that fixed amount.
5. Convertible Preference Shares: Convertible preference shares give the shareholders the option to convert their preferred shares into a fixed number of common shares, usually after a specified period. This allows the shareholders to benefit from the company’s growth and potentially higher stock prices.
6. Non-Convertible Preference Shares: These shares cannot be converted into common shares and only provide fixed dividend payments.
7. Redeemable Preference Shares: Redeemable preference shares can be bought back or redeemed by the company after a specified period or on a specific date, at the company’s discretion or upon certain conditions being met. Shareholders receive the par value of the shares and any outstanding dividends upon redemption.
8. Irredeemable or Perpetual Preference Shares: These shares have no maturity date or redemption date, and the company is not obliged to redeem them. They remain outstanding indefinitely, providing fixed dividends to the shareholders.

These types of preference shares can be combined in various ways to create hybrid securities with different rights and preferences, allowing companies to tailor their capital structure to their needs and investors to choose securities that match their risk tolerance and investment objectives.

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