Uncovered: Five different types of preference shares

Fsp Invest, 13 Jan. 2014

Tags: preference shares, what is a preference shares, cumulative preference share, non-cumulative preference shares, redeemable preference share, convertible preference shares, participating preference share, shares, investing, types of preference share

As well as ordinary shares that you can buy and sell on the stock market, there are also preference shares. This type of share is an interesting mix of equity and debt. Preference shares are very similar to how ordinary shares work, but they carry a guaranteed percentage dividend. Read on to find out more about preference shares and the different types available…

Companies prioritise preference shareholders over ordinary shareholders, Gareth Stokes in Fear, Greed and the Stock Market explains…

A preference shareholder will get their dividend payment before ordinary shareholders.

There are a number of different types of preference shares you get. Let’s take a closer look at these…

The array of preference shares available

Cumulative preference shares
If a company can’t pay preference share dividends in a particular financial year, the company will pay the amount of these ‘unpaid’ dividends in subsequent years when results allow.

Non-cumulative preference shares
If a company can’t pay preference share dividends in a particular year, the holder of a non-cumulative preference share forfeits the right to this dividend.

Redeemable preference shares
A company issues a redeemable preference share with the provision that the company will be able to redeem this share at some future date. This means the company will be able to ‘buy’ these shares back, and remove them from circulation.

Convertible preference shares
A company who issues a convertible preference share may decide to convert it into an ordinary share.

Participating preference shares
The holder of a participating preference share will not only receive the fixed dividend entitlement; but will also receive the ordinary share dividend too.

So there you have it, the five different types of preference shares there are.

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