Preference Shares (Preferred Stock)

MoneyBestPal Team
A type of instrument issued by businesses that combine characteristics of both equity and debt.

Preference shares, often known as preferred stock or simply preferred, are a type of instrument issued by businesses that combine characteristics of both equity and debt. Unlike to common shares, preference shares normally do not have voting rights, albeit they do indicate ownership in a corporation. 

Preference shareholders typically receive a predetermined dividend payment in exchange for their loss of voting rights; this payment is required to be made before any dividends are distributed to common shareholders.

According to the precise conditions of the security, preference shares may have a variety of features. Certain preference shares may be cumulative, which means that if a corporation is unable to make the dividend payment in any year, it must make up the lost payment in subsequent years before making dividend payments to common shareholders. A non-cumulative preference share is one that does not require future years to make up for missed payments.

Other features that preference shares may have include the ability to be converted into common shares, the ability for the company to repurchase the shares at a predetermined price, and the ability for the shareholder to sell the shares back to the company at a predetermined price. When preference shares are issued, the particular terms are often outlined in a prospectus or other offering document.

Companies frequently employ preference shares as a tool to raise capital without reducing the voting power of current owners. They might also appeal to investors seeking a fixed-income investment with certain characteristics of an equity investment. Preference shares may not be appropriate for all investors, though, as they are less liquid than regular shares and frequently have a lower potential for capital growth.