Types of Preference Shares – Issued by the Company
Preference shares or in other words preferred stock are shares of a company’s stock along with dividend that is paid-out to shareholders before stock dividends are issued. If the company bears bankruptcy, preferred stock holders are entitled to be paid from assets of the company before common stockholders. Mostly, preference shares have a fixed dividend, whilst common stocks do not.
Advantages of Preference Shares:
- Foremost Dividend: Like said, one of the benefits of shareholders is that preferred shares have a fixed dividend that must be paid-off before any dividend(s) can be paid to common shareholders. Whilst dividends are paid only if the company turns a profit; there are some preferred shares like cumulative shares that allow for the accumulation of unpaid dividends.
- Company Assets: Additionally, in the event of liquidation and bankruptcy, preference shareholders have a high claim on company assets as compared to common shareholders. This makes these shares particularly enticing towards the investors with low risk-tolerance.
- Re-purchase Shares: There are companies that can issue callable preferred shares, which afford them full right to re-purchase shares at their discretion. Simplifying in a way, that the company can purchase any outstanding shares at the market price, and can re-issue shares with a low dividend rate, thus, reducing the cost of capital.
Look below to know the types of preference shares. Here:
- Cumulative Preference Shares: It states a provision that requires the company to pay dividends to all the shareholders, including those who were omitted in the past. However, these dividend payments are guaranteed, but not paid always when they are due. Sometimes, additional interest (compensation) is awarded to holder.
- Non-cumulative Preference Shares: Dividend on these shares can be paid off only out of profits of that particular year. The right to claim the dividend will lapse only if there is no profit earned in the particular year.
- Participating Preference Shares: Keeping a fixed rate of divide aside, the holders are also entitled to participate with the ‘equity shareholders’ in the profits which remain only after paying a dividend to them (upto a certain level).
- Non-participating Preference Shares: In this, the holders are entitled to a fixed dividend rate and don’t share in the surplus profits. The whole profit will go to equity shareholders.
- Convertible Preference Shares: Here, the shareholders have a right to get their preference shares converted into equity shares within a certain time.
- Non-convertible Preference Shares: These preferred shares don’t carry the right of conversion into equity shares.
- Redeemable Preference Shares: These shares give the investor a piece of ownership in a company, although, these shares confer different share as compared to common stock. Additionally, the company has full right to buy back shares if it chooses. Shares that can be easily redeemed after a fixed time or giving notice at any time
- Irredeemable Preference Shares: These shares are a bit different from other types of (preference) shares. There is no maturity date which certainly makes this similar to equity except the fixed dividend of these shares. They are also called perpetual preference share capital.
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