Although holders of preference shares and bonds are both entitled to regular distribution payments, preference shares do not have a maturity date and can continue in perpetuity, unlike bonds. Bondholders are entitled to the receipt of regular interest rate payments, while holders of preference shares receive regular dividend payments. Bondholders are creditors of the company, having loaned it money, while holders of preference shares own a piece of the company. Unlike bond payments, which are mandatory, holders of preference shares may miss some dividend payments if the company does not make a profit. If the preference shares are cumulative, the investor is entitled to receive payment for past missed dividends prior to any dividends being paid to common shareholders.

Bonds have fixed maturity and ultimately expire, limiting the amount of interest paid out. Preference shares continue as long as the company is in business. Bondholders, as creditors of the company, have a higher chance of being paid versus holders of preference shares, depending on the priority of the debt. Bonds may be secured by assets of the company. The principal can be paid back to the bondholder by the sale of those assets in case of a bankruptcy. Unsecured bonds are not backed by any assets of the company and have a lower likelihood of receiving any distributions during bankruptcy.

Holders of preference shares, also called preferred shares, receive dividend payments before common shareholders. The amount of the dividend is often fixed. In the case of bankruptcy or dissolution, holders of preference shares have a higher priority over common shareholders in being paid off when the company's assets are liquidated. As a practical matter, preference shareholders are unlikely to receive any money during a bankruptcy dissolution, as they are fairly low on the priority list for repayment.

  1. What is the difference between preference and ordinary shares?

    Preferred shareholders have a higher priority claim to the assets of a corporation in case of insolvency than common shareholders. Read Answer >>
  2. What are some examples of preferred stock, and why do companies issue it?

    Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
  3. What is the difference between preferred stock and common stock?

    Preferred stockholders have a greater claim to a company's assets and earnings than common stockholders, but may not have ... Read Answer >>
  4. What are the advantages and disadvantages of preference shares?

    Preference shares have advantages and disadvantages for both investors and issuing companies. Read Answer >>
  5. What are the types of share capital?

    Companies obtain share capital by selling ownership shares to the public. The two types of share capital are common stock and preferred ... Read Answer >>
Related Articles
  1. Managing Wealth

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  2. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  3. Managing Wealth

    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

    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.
  5. Investing

    Investing in Preferred Stock:The Basics

    Preferred stocks provide income as well as the potential to appreciate in value.
  6. Investing

    Preferred Stock ETFs With Huge Dividends

    If you prefer huge dividend yields, you might want to consider having a preferred stock ETF in your portfolio.
  7. Financial Advisor

    An Overview Of Corporate Bankruptcy

    When public company files for corporate bankruptcy, the bondholders are first in line to receive their share back. Equity holders on the other hand, are second in line to bondholders when a corporate ...
  8. Investing

    Corporate High-Yield Bonds Vs. Equities

    Equities and corporate bonds often play a significant role in the diversification of a portfolio.
  9. Managing Wealth

    Analyzing GE's Preferred Stock (GE)

    Learn why General Electric Company's new Series D Perpetual Preferred stock is an excellent choice for investors desiring a safe and steady income stream.
  1. Preferred Stock

    A class of ownership that has a higher claim on assets and earnings ...
  2. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  3. Participating Preferred Stock

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

    A dividend that is accrued and paid on a company's preferred ...
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center