Preference Shares

Preference shares, also known as preferred stock, are a type of equity security that gives the shareholder ownership in a company along with special rights and privileges compared to ordinary (common) shareholders..

Key Features Priority in Dividends Preference shareholders usually receive fixed dividends before any dividends are paid to common shareholders. Dividends may be cumulative (accumulating if unpaid) or non-cumulative. Priority in Assets In the event of liquidation or bankruptcy, preference shareholders are paid before common shareholders but after debt holders. Limited Voting Rights Typically, preference shareholders do not have voting rights in the company, except under special circumstances. Hybrid Nature Preference shares combine characteristics of equity (ownership in the company) and debt (fixed returns). Enhanced Security and Appeal Due to priority in dividends and assets, preference shares are less risky than common shares but usually offer lower returns.

Example: A company declares ₹10 per share dividend for preference shares. Even if the company’s profits are limited, preference shareholders are paid before common shareholders. In case of liquidation, preference shareholders receive their capital back before common equity holders.