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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 a dividend, preference shareholders receive dividend payments before common shareholders.  Preference shares usually have a fixed dividend, which often means the company is obligated to periodically declare and pay the dividend.  This fixed dividend component makes preference shares similar to bonds.

In the event of a liquidation of the company, usually due to bankruptcy, the preference shareholders are paid before the common shareholders.

A less desirable aspect of preference shares is that unlike common shares, preference shareholders are not entitled to vote at company shareholder meetings.  Thus, they have no say in matters like electing the board of directors and merger proposals.

Preference shares come in a number of different types.

  • Cumulative preferred shares means that the shares earn a dividend on a periodic basis. If the company does not declare and pay the dividend for one period, it must pay it later.  Unpaid dividends accumulate until paid.
  • Non-cumulative preferred shares also have a dividend right, but if the company skips the dividend, it doesn’t have to pay it later.
  • Convertible preferred shares give the shareholder the right to convert the shares into common stock.
  • Finally, there is participating preferred, which gives the preferred shareholder fixed dividends plus the possibility of extra dividends should the company achieve certain business goals.
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