EXPLANATION OF DIFFERENT TYPES OF PREFERENCE SHARES

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EXPLANATION OF DIFFERENT TYPES OF PREFERENCE SHARES

Preference shares, also known as preferred stock, are a type of equity that has properties of both debt and equity. They have preferential rights over common shares in several aspects, particularly in the payment of dividends and during the liquidation of assets. Here are the different types of preference shares:

There are different types of preference shares that balance the elements of risk, return, and control, thus meeting various investor needs and company strategies.



1. Cumulative preference shares - cumulative preference shares have the objective to provide the investor some security regarding the dividend payment; in case a company is unable to pay dividends in any year, the unpaid dividends accumulate and must be paid in future years prior to dividends being paid to common shareholders. Higher income assurance is provided for the investor.


2. Non -cumulative preference shares - non-cumulative preference shares do not carry forward unpaid dividends. It simply means that if the company does not declare any dividend in a given year, the investors cannot claim the same in respect of that year in the future. This type reduces the financial burden on the company during poor financial periods but increases income uncertainty for shareholders.


3. Convertible preference shares - They have the option to convert these shares into a fixed number of common shares, so there exists capital appreciation when the stock price rises. This feature may attract those investors who intend to receive stable income combined with growth potential.

 

4. Non-convertible preference shares - non-convertible preference shares are not convertible into common stock and remain as preference shares during their whole life. This provides stable, predictable dividend income without the added complexity and possibly extra risk associated with conversion.


5. Redeemable preference shares - Theses shares permit a firm to redeem them after a fixed period or on a fixed date and thus give their investors a definite way out while giving the company flexibility in their capital structure.


 6. Irredeemable preference shares -They exist perpetually until the winding up of the company and contribute to the continuum of fixed income for investors but without a preordained exit point. Irredeemable preference shares are not redeemable during the lifetime of the company.


7. Participating preference shares- They provide an opportunity to participate in the surplus profits of the company after the fixed dividends have been paid, hence potentially greater returns during high-profit years. For this reason, they will be especially attractive where the user expects high profitability. 


8. Non-participative preference shares- non-participating preference shares accord just the fixed dividend and deny shareholders an opportunity to share the extra profit. Hence, they offer stability and predictability but limit upside potential.


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