27 Jun, 2025
4 mins read
When it comes to investing in a company, most people think of equity shares. But there’s another important category - preference shares. These offer investors a unique combination of fixed returns and safety, making them an interesting option for those who want a more stable income with some ownership rights.
In this blog, we’ll explain what are preference shares, their key features, different types, and how they work in real-life situations.
Preference shares, also called preferred stock, are a class of shares that provide fixed dividends and have priority over equity shares when it comes to dividend payments and capital repayment. However, they usually do not carry voting rights.
They are termed "preference" shares because of two main privileges:
Preference in receiving dividends before equity shareholders
Priority in return of capital during company liquidation
In simple terms, the meaning of preference shares lies in their hybrid nature - offering the fixed-income appeal of debt along with partial ownership.
Here are the main characteristics that make preference shares different from equity (features of preference shares):
Fixed Dividend: Holders receive a regular, predetermined dividend.
Priority in Payments: Preference shareholders are paid before equity shareholders in both dividends and liquidation.
Limited Voting Rights: Generally, they do not have voting rights unless their dividends are unpaid for a specific period.
Convertibility: Some preference shares can be converted into equity after a fixed time.
Redemption Option: Redeemable preference shares can be bought back by the company.
Cumulative vs. Non-Cumulative: Cumulative shares collect unpaid dividends, while non-cumulative do not.
These features make preference shares ideal for conservative investors who value income stability.
Preference shares can be classified into several categories based on their features. Here’s a table for clarity:
|
Type |
Description |
|---|---|
|
Cumulative |
Unpaid dividends are carried forward. |
|
Non-Cumulative |
No accumulation of unpaid dividends. |
|
Redeemable |
Can be repurchased by the issuing company. |
|
Irredeemable |
Cannot be bought back during the company’s life. |
|
Convertible |
Can be converted into equity shares. |
|
Non-Convertible |
Cannot be converted. |
|
Participating |
Eligible for extra profits after equity dividends. |
|
Non-Participating |
Only entitled to fixed dividends. |
Understanding the types of preference shares helps investors choose options that align with their income and risk preferences.
Both investors and companies find preference shares beneficial for various reasons (advantages of preference shares):
Stable Income: Investors receive fixed dividends, which is attractive for those seeking regular income.
Lower Risk: Since they have payment priority, the investment is relatively safer than equity.
Customisation: Companies can issue different types with specific rights to match their financial strategy.
Capital Access Without Dilution: Firms can raise funds without giving up voting control.
Despite the benefits, there are some downsides:
Limited Voting Rights: Investors usually don’t have a say in company decisions.
No Guarantee of Dividend: Especially for non-cumulative shares, dividends can be skipped if profits are insufficient.
Less Appreciation Potential: Returns are fixed, so there’s limited scope for capital gains.
Lower Priority Than Debt: In liquidation, creditors are paid before preference shareholders.
Let’s look at a few scenarios to understand how they work (examples of preference shares):
Cumulative Preference Shares: Suppose a company skips dividends in one year due to low profits. For cumulative shares, the unpaid dividend gets added to the next year’s payout.
Convertible Preference Shares: A startup offers shares that convert into equity after 3 years. This gives investors a fixed income now and potential equity participation later.
Participating Preference Shares: If a company earns high profits, participating shareholders receive their fixed dividend and a share of extra profits after equity shareholders are paid.
These real-world examples of preference shares demonstrate how different types can suit various investor needs.
Preference shares offer a balanced investment option, combining the steady income of debt with some benefits of equity. While they don’t provide control over company decisions, their predictable dividends and priority status make them appealing for conservative investors. For companies, they offer a flexible financing tool that doesn’t dilute ownership.
Understanding their features and types of preference shares helps you decide whether they align with your financial goals, especially if you seek reliable returns with moderate risk.
They can be a good choice for those looking for regular income with lower risk than equity. However, they lack voting rights and growth potential.
In the preference shares vs equity shares comparison, preference shares offer fixed dividends and payment priority but usually don’t carry voting rights. Equity shares provide ownership control and higher growth potential but carry more risk.
Yes, individuals can—who can buy preference shares includes retail investors if these are offered through public issues, private placements, or listed on stock exchanges. Always read the terms before investing.
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