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Preference Share – Meaning and its type

Published : September 26, 2017

Preference Share - Meaning and its type

Preference shares are the shares those are preferred over common shares at the time of profit distribution. Owners of preference shares receive regular dividends. At the time of liquidation of the company they are paid after bondholders and creditors, but before equity holders.

Preference shareholders enjoy the following two preferential rights:

  • Dividend at a fixed rate or a fixed amount on these shares before common equity holders.
  • At the time of winding up of the company return on preference share capital is preferred before the equity share capital.

Preference shareholders also have a right to participate in excess profits left after being paid to equity shares or has a right to participate in the premium at the time of redemption.

But preference shareholders do not carry any voting rights.

What are the types of preference shares?

There are seven types of preference shares

  • Cumulative Preference Shares

If a company does not declare dividends for a particular year they are carried to next year, so they are treated as arrears. If these arrears are carried forward to subsequent years, then such preference shares are known as cumulative preference shares.

So, the unpaid dividends on preference shares are known as cumulative preference shares, till it is paid off in full.

  • Non-Cumulative Preference Shares

Non-Cumulative preference shares are those shares, which have right to get a fixed rate of dividend from the profits of current year only.

These shares do not carry the right to receive arrears of dividend, so in case company fails to pay the dividend in any year then they need to be paid out of future profits.

  • Redeemable Preference Shares

These preference shares can be redeemed or repaid after the expiry of a fixed period or as per the prescribed notice issued by the company, are known as Redeemable Preference Shares.

  • Non-redeemable Preference Shares

Those preference shares cannot be redeemed during the life time of the company, are known as non-redeemable preference shares. The amount of such shares is paid at the time of liquidation of the company.

  • Participating Preference Shares

Participating preference shares have the right to participate in surplus profits of the company at the time liquidation.

  • Non-Participating Preference Shares

Non-Participating Preference Shareholders don’t have any right to participate in the surplus profits at the time of liquidation.

  • Convertible Preference Shares

Convertible preferred stocks are those preferred stocks which include an option for the holders to convert the preferred shares into fixed number common shares at a predetermined date.


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