26 Mar 2018

What is Preference Shares

Finance feed by:

CA Sushil Modi
M.com,CA
CA in Job
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   •    15 Year 8 Month  experience

Preference shares are shares which are preferred over common or equity shares in payment of surplus or dividend i.e preference shareholders are the first to get dividends in case the company decides to pay out dividends. Owners of preference shares gets fixed dividend. However, in the event of liquidation of the company they are paid after bond holders and creditors, but before equity holders.

To simplify, when you buy shares from the company you become part-owner of the company, you are common shareholder or equity shareholder. One cannot directly own preference shares as it is for only Board of Directors, promoters of the company or financial institutions. They are still not offered to retail-investors

Other than the preference in respect of dividend and asset payout in case of liquidation, preference shares can also be converted into common stock. Further, at the discretion of the company, these shares can be redeemed before maturity.
Also referred to as preferred stock or preferred shares, these may have any combination of attributes i.e features of both equity and debt and so is considered a hybrid instrument in general. The articles of association lays down the terms of the preferred stock.

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