Preference Shares

Preference shares are a type of equity security that has a higher claim on a company's assets and earnings than common shares. This means that preference shareholders receive their dividends before common shareholders, and in the event of liquidation, they receive their share of the company's assets before common shareholders.

Preference shares typically pay a fixed dividend, which is set at the time of issuance. This dividend is usually higher than the dividend paid on common shares, but it is not guaranteed. If a company does not have enough earnings to pay the preference dividend, it can skip the dividend payment without going into default.

Preference shares can be either cumulative or non-cumulative. Cumulative preference shares accumulate unpaid dividends, so if a company does not pay a dividend in one year, it must pay the dividend in full in the following year before it can pay any dividends to common shareholders. Non-cumulative preference shares do not accumulate unpaid dividends, so if a company does not pay a dividend in one year, it does not have to pay it in the following year.

Preference shares can also be either convertible or non-convertible. Convertible preference shares can be converted into common shares at a predetermined price. This gives preference shareholders the option to convert their shares into common shares if they believe that the common shares will appreciate in value. Non-convertible preference shares cannot be converted into common shares.

Preference shares are a less risky investment than common shares, but they also offer lower returns. They are often used by investors who are looking for a steady income stream, but who are not willing to take on the risk of investing in common shares.

Here are some additional details about preference shares:

• Preference shares are often issued by companies that are in their early stages of growth. This is because preference shares provide a way for companies to raise capital without diluting the ownership of their common shareholders.
• Preference shares are also sometimes issued by companies that are in financial distress. This is because preference shares offer a way for companies to raise capital without having to pay a high interest rate.
• Preference shares are not as liquid as common shares. This is because there is not as much demand for preference shares, and they are not as easy to trade.

Overall, preference shares are a good investment for investors who are looking for a steady income stream and who are willing to accept a lower return on their investment.