Preference shares are shares that are given priority over normal shares. These shares entitle the shareholder to get paid their dividend first before other shareholders. If the company becomes bankrupt, the preference shareholders are entitled to be paid first from the company’s assets behind the company’s secured creditors.
Do they pay out a higher dividend?
Preference shares do generally pay out a higher dividend however it is usually a fixed dividend, whereas ordinary shares get paid a variable dividend.
However, preference shareholders are entitled to get paid out their dividend and all accrued dividends prior to ordinary shareholders getting paid their dividends.
Types of Preference Shares
There are many different types of preference shares, each giving a different benefit to shareholders, this enables shareholders to purchase custom shares that match their investment strategy. The main types are as follows:
1. Cumulative Preference Shares
This is where the arrears of dividends cumulate and the arrears are paid to the preferred shareholders before paying any dividend to any other equity shareholders when a profit is made. The company can still choose not to pay a dividend if they make a loss in a certain year, but that dividend accrues to the next year.
2. Convertible Preference Shares
These shares possess a right to convert their preference shares to ordinary shares as long as the terms and conditions that are set by the company are met.
3. Redeemable Preference Shares
This kind of share has a set maturity date where the company will repay the capital amount that was paid by the shareholders at the time of the purchase and then will stop paying the dividend to the shareholder.
4. Participating Preference Shares
This is a unique kind of preference share. It allows the shareholder to have a share of the company’s profits apart from the fixed dividend that is given to preference shareholders.
5. Preference Shares with a Callable Option
With this share, there is an option for the company who sold the share to buy the share back at a pre-determined price on or before a certain date.
6. Adjustable Rate Preference Shares
These shares that do not have a fixed dividend. The dividend with these shares are calculated based on the current interest rate and other factors that may come into play.