Preference Shares

Loading the player...

What are 'Preference Shares'

Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.

BREAKING DOWN 'Preference Shares'

Types of Preference Shares

There are four types of preference shares:

Cumulative preferred stock includes a provision that requires the company to pay preferred shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments.

Non-cumulative preferred stock does not issue any omitted or unpaid dividends. If the company chooses not to pay dividends in any given year, the shareholders of the non-cumulative preferred stock have no right or power to claim such forgone dividends at any time in the future.

Participating preferred stock provides its shareholders with the right to be paid dividends in an amount equal to the generally specified rate of preferred dividends plus an additional dividend based on a predetermined condition. This additional dividend is typically designed to be paid out only if the amount of dividends received by common shareholders is greater than a predetermined per-share amount. If the company is liquidated, participating preferred shareholders may also have the right to be paid back the purchasing price of the stock as well as a pro-rata share of remaining proceeds received by common shareholders.

Convertible preferred stock includes an option that allows shareholders to convert their preferred shares into a set number of common shares, generally any time after a pre-established date. Under normal circumstances, convertible preferred shares are exchanged in this way at the shareholder's request. However, a company may have a provision on such shares that allows the shareholders or the issuer to force the issue. How valuable convertible common stocks are is based, ultimately, on how well the common stock performs.

Significance to Investors

Preference shares are an optimal alternative for risk-averse equity investors. Preference shares are typically less volatile than common shares and offer investors a steadier flow of dividends. Also, preference shares are usually callable; the issuer of the shares can redeem them at any time, providing investors with more options than common shares.

RELATED TERMS
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Participating Preferred Stock

    A type of preferred stock that gives the holder the right to ...
  3. Preferred Dividend

    A dividend that is accrued and paid on a company's preferred ...
  4. Cumulative Preferred Stock

    A type of preferred stock with a provision that stipulates that ...
  5. Current Dividend Preference

    A safety feature of preferred shares, whereby holders of such ...
  6. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
Related Articles
  1. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  2. Investing

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  3. Investing

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  4. Investing

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  5. Investing

    What is Cumulative Preferred Stock?

    Cumulative preferred stock is a type of stock that stipulates any skipped or omitted dividends must be paid to its holders before common shareholders can receive dividends.
  6. Markets

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  7. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  8. Markets

    Which Is Best: Cash Dividend Or Stock Dividend?

    Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.
  9. ETFs & Mutual Funds

    Looking for Yield? Check Out This Preferred Stock ETF (PFF)

    Take a look at a review of the performance of the most popular preferred stock ETF, the iShares U.S. Preferred Stock ETF from BlackRock.
  10. Trading

    Preferred Stocks versus Bonds: How to Choose

    What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
RELATED FAQS
  1. What are the advantages and disadvantages of preference shares?

    Learn about the advantages and disadvantages of preference shares to both investors and issuing companies, including the ... Read Answer >>
  2. What is common stock and preferred stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
  3. How are preferred stock dividends taxed?

    Discover the intriguing debt and equity characteristics of preferred stock, and learn about how preferred stock dividends ... Read Answer >>
  4. What are the different types of preference shares?

    Learn about the difference between the four types of preference shares – callable, cumulative, convertible and participatory ... Read Answer >>
  5. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference shares and why investors might value them more than common ... Read Answer >>
  6. What is the difference between preference and ordinary shares?

    Learn about the main differences between preference and ordinary shares including how dividends are paid for both types of ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center