When looking at stock options to start your investment plans, you must look at all the possibilities and combinations available to you in the stock market. Most people think of ordinary shares (Common stocks showcase the shares, the ownership in a corporation, and the standard type of stock that people prefer investing in). Still, preference shares or stocks are lucrative investment options with a combination of liquidation preference and income-generated features of corporate bonds that offer equity benefits of shareholding. 

So, let's take a look at what preference shares are, the different types available, and the features.

What are Preference Shares?

Preference shares or stocks are so-called because preferred shareholders lay higher claims on issuing company assets than ordinary shareholders. In most cases, preferred shareholders must receive payment for their interest in a company before common shareholders in case the company goes into bankruptcy and liquidation. 

When a company decides to pay its investors dividends, preference shareholders are the first to get payouts. These shares are often released to raise capital for a company and are known as preference share capital. When a company goes through a loss and is winding up, payments will be made to the preference shareholders first and then the equity shareholders. 

When preference shares can be converted to equity shares, they are known as convertible preference shares. Some shareholders also receive arrears of dividends, known as cumulative preference shares. 

What are the Features of Preference Shares?

Several features of preference shares make ordinary investors receive higher interest rates even during the lower phase of economic growth. Some of the best features of preference shares are: 

• Converted into Common Stock: These shares can be quickly converted into common stock. When shareholders want to change their holding position, they can convert any predetermined preference stocks into common stock. Some preference shares offer investors the option to convert even beyond a specific date, whereas others need permission and approval from the company's BOD. 

• Dividend Payout: Preference shares help shareholders receive dividend payouts, especially when other stockholders might not be receiving dividends or may get them later. 

• Dividend Preference: Regarding dividends, preference shareholders have a much more significant advantage as they receive dividends first than equity and other shareholders. 

• Voting Rights: Preference shareholders have the right to vote first in case of extraordinary events. But this can happen in some cases only. Generally, the purchase of stocks in a company does not provide voting right. This is only available for preference stocks. 

• Preference in Assets: When planning company assets liquidation, preference shareholders always receive priority over other shareholders.

Types of Preference Shares

There are nine different types or options of preference shares: 

1. Convertible Preference Shares

Convertible preference shares are those that can be converted easily into equity shares. Notably, these shares are only converted once the expiry of a specific time within a given period and stated memorandum. Ideally, these shares are beneficial for those investors who want to receive preferred share dividends. They also offer rewards for those who want to partake in the change in the cost of equity shares. So, such shares help investors generate fixed earnings with the option of collecting higher returns frequency.      

2. Non-Convertible Preference Shares

On the other hand, these are shares that are non-convertible. They cannot be shifted into equity shares. But, they still enjoy preferential benefits when it comes to receiving dividends or when a company liquidation is in process. 

3. Redeemable Preference Shares

This type of preference share serves as one of the most effective ways to help finance significant companies. These shares can come with a mixture of equity and debt financing and are easily traded on stock exchanges. Typically the company has the right to repurchase the shares once issued to fulfill its needs. Subsequently, the redeemable preference shares come in handy to cushion the impact of inflation and the decline of the monetary rate. 

4. Non-Redeemable Preference Shares

These shares cannot be redeemed or repaid during the lifetime of the company. But, shareholders must wait until the company decides to close their current operations and liquidate the venture in totality or to initiate the same. This also makes the shares a perpetual liability for the business.  

5. Participating Preference Shares

The number of shares extends to the right to partake in surplus profits during liquidation as the company has to pay the shareholders. So, to elaborate, the participating preference shareholders can receive fixed dividend rates and have a share in the company's extra earnings. Most people investing in participating preference shares in these companies are likely to generate higher profits. 

6. Non-Participating Preference Shares

According to the name, non-participating preference shareholders do not get a share in the extra earnings or a surplus in assets during the company liquidation. Because of this, shareholders only receive pre-fixed dividends. 

7. Cumulative Preference Shares

The shares come with a provision that allows shareholders to receive dividends in arrears. So, if a company does not bring in enough profits, they pay cumulative dividends the following year. Let's say a company, XYZ Inc, issues cumulative preference shares for Rs. 100 each and pays 10% as a dividend annually. But, due to the low returns, the company only pays Rs. 50 as dividends that year. However, the following year, the company could not pay the dividend due to a downward trend in the economy. So, once profits were generated, the company decided to pay the current and previous outstanding dividends to shareholders. Cumulatively, the company paid Rs. 100 as shareholders' dividends. 

8. Non-Cumulative Preference Shares

Unlike cumulative preference shares, these non-cumulative ones do not give accumulated dividends. They are paid in the current year's net profits. So, when a company incurs a loss, shareholders cannot claim dividends from their future profits. 

9. Adjustable Preference Shares

The rates of dividends paid on these are floating and are heavily dependent on the present market rates. This directly influences the total dividend received by the shareholders in the investment process.

Understanding preference shares in this way can be confusing. So, let's take a look at the classified version:

What is the Difference Between Preference shares and Equity shares?

Preference shares and equity shares are similar to each other in general, but they are still two distinct entities. Let's take a look at how they are different from one another: 

Conclusion

Preference shares are the best way to earn a good position in a company's shareholders group. Once the company seeks liquidation in stocks, preference shareholders have the upper hand because they get the maximum of claimed dividend payments. 

But before you invest in the shares and the stock market, make sure that you understand the value of the stock and the ups & downs that are involved with it. Study each stock and how the market can affect you financially before making a decision. Post that if you are still unsure, connect with a financial advisor or stockbroker today!