Types of Preference Shares

Preference share can be defined as those shares that carry preferential right with regard to the dividend as well as repayment of capital in case of winding up of the company. In order to understand it in simple terms consider the example of apple farm suppose the farm owner in lieu of your investment of $100 in the farm gives you 2 options that either you will get 5 apples if production is above 100 apples or you will get 5 percent apples above 100 apples and if you select the first option then it is equivalent to preferred stock and if you select other option then it is equivalent to equity shares. There are many types of preference shares which company can issue; here are some of them –

Preference Shares Types

Cumulative and Non-cumulative Preference Shares

Cumulative preference shares give the right to the preference shareholders to receive arrears of dividend which were not paid in previous years due to company making loss. While Non- cumulative Preference shareholders do not have right like Cumulative preference shareholders and therefore they cannot demand any arrears of dividend which were not paid during previous years by the company. So for example if a preference shareholder holds 100 preference shares of $100 dollars face value carrying a dividend of 10 percent and due to some reason company has made loss and not paid dividend for last 3 years then in case of cumulative preference shares the shareholders will have right to receive $30 per share as dividend for past 3 years whereas non-cumulative preference shareholders will not receive the $30 per share dividend.

Participating and Non Participating Preference Shares

Participating Preference shareholders have the right to receive any remaining profit which is left after payment of dividend to the equity shareholders, while Non Participating Preference shareholders do not have such rights. So for example if the company makes the profit after tax of $20000 and out of which company pays $5000 to preference shareholders and $10000 to equity shareholders, now in the remaining $5000 participating preference shareholder will also get a share with equity shareholders.

Convertible and Non-Convertible

Convertible Preference shares can be converted into equity shares if preference shareholder decides to do so while Non-Convertible Preference shares do not have any such right. So in the case of apples if the owner gives you the option to switch from 5 apples per day to 5 percent of production then it is an example of a convertible option given by the owner. As far as shareholders are concerned they prefer to have convertible preference shares because that give them the flexibility to convert their holdings into equity whenever they want.

Redeemable and Non-Redeemable

Redeemable Preference shares are those shares which have to be repaid by the company after a fixed period of time from the date of issue of such shares while Non-Redeemable Preference shares cannot be redeemed by the company except on winding up of the company.

As one can see from the above that preferred stock or preference shares are of many types and investors should look carefully and then decide in which type of preferred stock the investor wants to invest his or her money as each type has its own feature.

33 comments… add one
  • esmatullah mutahar

    thanks for the one who has shared this beneficial notes about the different type of preference shares …………it was really helpful for me,,,,,,,,,,,, thanks again

    • Vinish Parikh

      Glad you liked it

  • Karunesh jha

    Thanks, due 2 this its easy for us…

    • Vinish Parikh

      I am happy to hear that i am able to clear some doubts about this complex topic

  • sumana

    easy 2 understand…………..

  • kartheek

    it is a wordful day to prepare the shares for prestentation

  • Zameer

    Thanks for given easily understood notes.

  • Ada

    Thanks a lot its very usefull to me

  • alekhya

    thankxxx fr dis information…….

  • shivu

    Thanks its very easy to understood….


    Thanks for given easily understood notes.

  • Erick

    It is actually made simple to understand the types of preference shares

  • kisshore

    thank u so much… it is very useful notes for finance learners

  • Deepali

    its very helpful in making my presentation. thanks

  • mishaal saleem

    thanks it is very useful for me to increase my knowledge

    • Vinish Parikh

      The idea behind this site is to help people in increasing their most important wealth that is knowledge

  • pinal patel

    thnks to make easy for us

  • sufzal khan

    Thanks……coz its language iz to easy n everyone can easily understand it widout any difficulty…!!!!!

  • Hassan m yusuf

    Thanks very much 4 providing very comprehensive note.

  • muzi

    thankx for info it useful, reader friendly and understandable.

  • muskan

    gud job yar it was very easy to understand

  • Loveth

    Thanks much, it has really help me alot by increasing my level of understanding about preference shares also guiding me thru to impact d great understanding to others. This is the best, i’ll recommend it……

    • Vinish Parikh

      You are welcome, and i will make sure that readers like you never get disappointed with this website

  • umema faheem

    its a useful for me a lot to complete the preference share topic nd thnx to provide d information

    • Vinish Parikh

      Thanks for commenting

  • chandan sharma

    it`s easy in language and also to understand……thks.

    • Vinish Parikh

      I always try to write complex topics in simple language, i am happy that my hard work is paying off

  • Name*

    thanxxx.its short and easy to understand

  • chandrakant rane

    thank i like this

  • Neha Nayak

    thank a lot… i liked it as it is very easy to understand ….

    • Vinish Parikh

      Thanks neha, glad you liked it.

  • Njogu peter

    Thank you its well elaborated

  • Swarna Thorpe

    It’s language is easy to understand

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