Preference Shares

Preference Shares So called because these have preference over equity shares in the matter of distribution of post – tax profit, and have a prior claim on the assets of the company in the event of liquidation. In terms of risk, these are less risky then equities, but more risky than secured debentures which precede them in the distribution of the company’s funds, and in the event of liquidation, which are paid off before preference shares. Preference shares are entitled to a fixed dividend, and cumulative preference share retain their retrospective claim on dividend when the company is not in a position to declare any dividend. Sometimes these shares are convertible into equity shares after a stated number of years, thus enjoying assured earnings while the company is getting established, and high earnings when it has established itself. When preference shares are redeemable, the company pays off the shareholder on a certain date, or issues equity shares of the value, but when they are irredeemable, the shareholder gets the fixed dividend in perpetuity or as long as the company lasts. Preference shareholders may or may not be given voting rights; they can usually only vote if their dividends are in arrears.

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