What are Preference Shares – Features, Types & Advantages
12 June, 2025
Synopsis
Preference shares offer fixed dividends and priority over common shareholders in payouts and asset claims.
They come in various types like convertible, redeemable, cumulative, and participating.
Ideal for investors seeking stable income with lower risk.
Usually lack voting rights and have limited capital appreciation potential.
When it comes to investing in stocks, different types of shares offer various benefits to investors. Preference shares are one such option that gives shareholders priority over common shareholders in terms of dividend payouts and claims on the company’s assets. This blog will delve into the preference shares meaning, their features, types, and the advantages they offer to investors.
What is Preference Share?
Preference shares, often referred to as preferred stocks, are a type of share issued by a company that provides certain privileges to the shareholders. Unlike common stockholders, preference shares holders are entitled to receive dividends before the common shareholders. In the event of a company's liquidation, preference shareholders are paid before equity shareholders but after debt holders. This type of share is primarily issued to raise capital for the company. While the dividend on preference shares is fixed, the shareholders typically do not have voting rights in company decisions, which distinguishes them from common equity shareholders.
Features of Preference Shares
There are several defining features of preference shares that make them an attractive investment option for many:
Fixed Dividends: One of the most significant features of preference shares is the fixed dividend payout. This provides a consistent income to investors, especially during volatile market conditions.
Priority in Payments: Preference shareholders have the right to receive dividends before common stockholders. In the event of a company’s liquidation, preference shareholders are also paid out before equity shareholders.
Convertible Options: Some preference shares can be converted into common stock, allowing shareholders to benefit from any appreciation in the company’s equity value over time.
No Voting Rights: Unlike common shareholders, preference shareholders generally do not have voting rights in the company, limiting their influence on business decisions.
Priority in Assets: In case of liquidation, preference shareholders have a priority claim over the company’s assets, providing an added layer of security for investors.
Types of Preference Shares
There are various preference share types, each offering different features and benefits. Below are the most common types:
Convertible Preference Shares: These shares can be converted into equity shares at a predetermined date and conversion rate, allowing shareholders to participate in the company’s growth.
Non-Convertible Preference Shares: These cannot be converted into equity shares, and shareholders are limited to receiving fixed dividends.
Redeemable Preference Shares: These shares can be redeemed by the company at a fixed price after a certain period, providing flexibility to the issuing company.
Non-Redeemable Preference Shares: These shares cannot be redeemed by the company, providing long-term stability to investors.
Participating Preference Shares: These shareholders receive a fixed dividend and also have the right to participate in the company’s surplus profits.
Non-Participating Preference Shares: These shareholders are entitled to a fixed dividend but do not participate in the surplus profits of the company.
Cumulative Preference Shares: If the company cannot pay dividends in a particular year, the dividends are accumulated and paid in subsequent years.
Non-Cumulative Preference Shares: In this case, if the company does not pay dividends in a particular year, shareholders cannot claim those missed dividends in the future.
Adjustable-Rate Preference Shares: These shares have a dividend rate that adjusts according to market interest rates.
Advantage of Preference Share
There are several advantages to investing in preference shares:
Fixed Income: Preference shareholders receive a fixed dividend, which provides a steady stream of income, making them an attractive option for conservative investors.
Priority in Payments: Preference shareholders are prioritised over common shareholders in receiving dividends and payments in case of liquidation, providing added security.
Lower Risk: Compared to equity shares, preference shares carry lower risk due to their fixed dividends and priority in the event of liquidation.
Convertible Option: Some preference shares can be converted into equity shares, allowing investors to benefit from the potential growth of the company’s stock price.
Tax Efficiency: In many jurisdictions, the dividends on preference shares are taxed at a lower rate than those on common stock dividends, making them an attractive tax-efficient investment.
Disadvantage of Preference Shares
Despite their benefits, preference shares come with some drawbacks:
No Voting Rights: Preference shareholders usually do not have voting rights, limiting their ability to influence company decisions.
Limited Capital Appreciation: While preference shares provide fixed dividends, they do not offer the same potential for capital appreciation as common equity shares.
Dividend Uncertainty: Although preference shareholders have priority, dividends are not guaranteed if the company is facing financial difficulties.
Liquidity Issues: Preference shares are not as liquid as common shares, making it difficult for investors to quickly sell their holdings in certain market conditions.
In conclusion, preference shares offer investors a secure income stream and priority in dividend payments and asset claims, making them an attractive option for those seeking stability. However, they come with certain limitations, such as the lack of voting rights and limited potential for capital appreciation. By understanding the features and types of preference shares, investors can determine if this investment option aligns with their financial goals.
FAQs
What are preference shares?
Preference shares are a type of stock that gives shareholders priority over common shareholders in receiving dividends and claims on the company's assets.
What are the types of preference shares?
There are several types, including convertible, non-convertible, redeemable, non-redeemable, participating, and non-participating preference shares.
What is the advantage of preference shares?
Preference shares provide fixed dividends, priority in payments, and lower risk compared to common shares.
Do preference shareholders have voting rights?
Typically, preference shareholders do not have voting rights in the company.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not an investment recommendation. Investments are subject to market risks and other risks.
