The preference shares are similar to equity shares but they do differ on certain features. The preference shares are a special type of share that pays fixed rate of dividend to the holder prior to the issuance of common shares dividend. Therefore, they hold preferential rights over equity shares. In case of bankruptcy event, the preference shares have the right to the company’s assets prior common shareholders. The major difference between preference and common equity shares is that they don’t hold voting rights as opposed to common shareholders.
Likewise, debt instrument, the investor receives fixed dividend for a predetermined tenure and receives principal amount at maturity. It combined the features of both equity and debt. Consequently, it attracts low risk appetite investors who wants to take less risk during uncertain events.
Types of Preference Shares:
- Convertible Preference Shares: At the end of the maturity they will get converted into regular equity shares.
- Non-convertible Preference Shares: At the end of maturity the principal gets paid to the investor. They are also listed on the exchange for selling prupose.
- Cumulative Preference Share: In loss-making year, the dividend is held up and carried over to the next year and will be paid in the next profitable year.
- Non-Cumulative Preference Share: The dividend will be written off and there is no carried forward of dividends.
- Participating Preference Share: They have the rights to enjoy the profits in form of increased dividend along with common equity.
- Non-Participating Preference Share: They are not entited to the surplus profits. They will only gets fixed dividends. The extra profits will get distributed to common shareholders.
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