Preference Shares and its Features

Preference shares are one of the special types of share capital having fixed rate of dividend and they carry preferential rights over ordinary equity shares in sharing of profits and also claims over assets of the firm. It is ranked between equity and debt as far as priority of repayment of capital is concerned.

Definition of Preference Share

Preference shares are a long-term source of finance for a company. They are neither completely similar to equity nor equivalent to debt. The law treats them as shares but they have elements of both equity shares and debt. For this reason, they are also called ‘hybrid financing instruments’. These are also known as preferred stock, preferred shares, or only preferreds in a different part of the world. There are various types of preference shares used as a source of finance.

Lets us understand the preference share in details with its specific features. Some of the features are of debt and others are of equity. It makes sense to discuss the features similar to debt and equity separately.

Features of Preference Shares Similar to Debt

Preference Shares and its Features

Preference Shares and its Features

Fixed Dividends: Like debt carries a fixed interest rate, preference shares have fixed dividends attached to them.

But the obligation of paying a dividend is not as rigid as debt. Non-payment of a dividend would not amount to bankruptcy in case of preference share.

Preference over Equity: As the word preference suggests, these type of shares get preference over equity shares in sharing the income as well as claims on assets. Alternatively, preference share dividend has to be paid before any dividend payment to ordinary equity shares. Similarly, at the time of liquidation also, these shares would be paid before equity shares.

No Voting Rights: Preference share capital is not allotted any voting rights normally. They are similar to debenture holders and do not have any say in the management of the company

No Share in Earnings: Preference shareholders can only claim two things. One agreed on percentage of dividend and second the amount of capital invested. Equity shares are entitled to share the residual earnings and residual assets in case of liquidation which preference shares are not entitled to.

Fixed Maturity: Just like debt, preference shares also have fixed maturity date. On the date of maturity, the preference capital will have to be repaid to the preference shareholders. A special type of shares i.e. irredeemable preference shares is an exception to this. They do not have any fixed maturity.

Features of Preference Shares similar to Equity Shares

Dividend from PAT: Equity share dividend is paid out of the profits left after all expenses and even taxes and same is the case with preference shares. The preference dividend is paid out of the divisible profits of the company. Out of the divisible profits, the preference dividend would be paid first and the remaining profits can be utilized for paying any dividend to equity shareholders.

Management Discretion over Dividend Payment: The payment of preference dividend is not compulsory and is a decision of the management. Equity shareholders also do not have any right to ask for dividends, the dividends are paid at the discretion of the management of the company. Unlike debt, the nonpayment of a dividend of preference shares does not amount to bankruptcy.

No Fixed Maturity: The maturity of a special variant of preference share is not fixed just like equity shares. This variant is popularly known as irredeemable preference shares.

There are some advantages and disadvantages of preference shares like no legal obligation for dividend payment, improves borrowing capacity, no dilution on control, costly source of finance etc.

Last updated on : June 27th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

Global Depository Receipt
  • Recourse and Non-Recourse Factoring
    Recourse and Non-Recourse Factoring
  • Hire Purchase
    Hire Purchase
  • Hybrid Financing Instruments
    Hybrid Financing and Various Such Instruments
  • External Source of Finance /Capital
    External Source of Finance / Capital
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook


    Related pages


    factors that influence dividend policyfixed asset turn over ratiosbi od accounttotal asset formulalc advising bankdefine turnover ratioroa ratio formulaexpenses meaning in hindidifferent theories of dividend policycapital lease agreement templatestretching accounts payablefixed asset turnover ratio formulavaluation waccreturn on shareholders fund formulastockholders vs shareholdersformula for cash ratioformula internal rate of returnpayback period problemsrations definitionhedging conceptresidual dividend approachadvantages and disadvantages of invoice discountingdifference between debit and credit transactionsshareholder vs stockholderwhat does payback period meancredit meaning in marathicapitalized cash flow methoddscr loancalculate internal rate of return on investmentimpairment of fixed assetsaccounts payable turnover calculatorjoint stock company disadvantagesamerican depository receiptsdefine interest coverage ratiothe term permanent current assets impliesirr on investmentabc method of inventorybudget investopediaformula for quick ratioearnings capitalization modeladvantages and disadvantages of profitability ratioscost pools and cost driverslessee and lessor agreementloan loss coverage ratiofinance lease accounting journal entriescorporate finance ratiosfixed charges coverage ratiohow to calculate breakeven in unitsdefine inventory turnovercalculating discounted paybackirr project managementgordon growth terminal valuewhy is the capital expenditure budgeting process importantcapitalize vs expenseeps formula accountingmeaning of incremental in hindiwhat is meant by weighted average cost of capital waccwhat is the difference between finance lease and operating leasehow to record a capital lease journal entrycalculating nwcliquidation expenses samplehow to compute net income in accountingdefinition of profit maximisationaverage weighted cost of capitalformula for calculating irrdividend valuation methodmanagerial accounting and decision makinghow to improve liquidityexample of decoupling inventorydebenture defdifference between npv & irrcompute accounts receivable turnoverwhats a current assetaverage trade debtors