What Are Preference Shares? Features, Types & Benefits finowings.com

Discover the financial world’s hidden gems – Preference Shares! In this guide, we’ll delve into the features, types, and benefits of preference shares, while shedding light on potential risks every investor should be aware of.

Features of Preference Shares:

Preference shares, often regarded as the hybrid investment instrument, come with a set of distinctive features:

Priority in Dividend Distribution:

Preference shareholders enjoy preferential treatment when it comes to receiving dividends, granting them a fixed rate before common shareholders.
Priority in Asset Distribution:

In the event of liquidation, preference shareholders have priority over common shareholders, ensuring they are among the first to recover their invested capital.
No Voting Rights:

Unlike common shareholders, preference shareholders typically do not have voting rights in company decisions. This feature allows for a stable investment without direct influence on corporate matters.
Types of Preference Shares:

Cumulative Preference Shares:

Accumulate unpaid dividends, ensuring shareholders receive their dues before common shareholders in subsequent years.
Non-Cumulative Preference Shares:

Do not accumulate unpaid dividends. If a dividend is not declared in a particular year, it is not carried forward.
Convertible Preference Shares:

Offer the flexibility to convert preference shares into common shares, potentially allowing investors to benefit from the company’s growth.
Redeemable Preference Shares:

Can be redeemed by the company after a specified period or at the company’s discretion, providing a degree of flexibility in capital structure.
Benefits of Preference Shares:

Stable Income Stream:

Preference shareholders enjoy a predictable income through fixed dividends, providing a stable cash flow.
Reduced Volatility:

With priority in dividend distribution and asset recovery, preference shares can offer a more stable investment compared to common shares.
Diversification of Portfolio:

Including preference shares in a diversified portfolio can enhance risk management by balancing the overall risk-return profile.