Investing in shares with a difference: The ins and outs of preference shares

Julie Brownlee, Fsp Invest, 04 Sep. 2015

Tags: preference shares, what are preference shares, how preference shares work, types of preference shares, shares, dividends,



When you decide to invest in shares on the stock market, chances are you’ll buy and sell ordinary shares. But these aren’t the only type of shares on the stock market.

There are also preference shares.

So what are preference shares? And are there different types?

Read on to find out…



What are preference shares?


Preference shares are a mixture of debt and equity. In comparison, ordinary shares are pure equity.

Preference shares come with the same characteristics of ordinary shares, but they don’t have voting rights.

What makes preference shares different is they come with a ‘guaranteed’ percentage dividend. A company must pay a dividend to preference shareholders before ordinary shareholders.

There are different types of preference shares and this makes a difference to how they work.


The different types of preference shares


Non-cumulative preference shares
If a company’s can’t pay its preference share dividends in a particular financial year, the shareholder won’t receive it at some time in the future.

Cumulative preference shares
If a company can’t pay its preference share dividends in a particular financial year, the shareholder will receive it at some time in the future when the company is in a position to do so.

Convertible preference shares
A company can convert this type of preference shares into an ordinary preference share if it decides at some time in the future.

Participating preference shares
A shareholder of this type of preference share also receives the ordinary share dividend on top of their preference share dividend.

Redeemable preference shares
A company can redeem this share at some time in the future. This means at a future date the company can buy these shares back and remove them from circulation.

So there you have it. The ins and outs of preference shares.

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