What is preference shares?

Preference shares are a type of ownership in a company that gives certain special benefits to the shareholders. These shareholders have a preference or priority when it comes to receiving dividends and getting their money back if the company is sold or goes out of business.

One of the main advantages of preference shares is that shareholders receive a fixed amount of dividend payment before regular shareholders. This means they get paid first when the company distributes its profits. It provides them with a stable income.

In case the company is liquidated or sold, preference shareholders are given priority over regular shareholders in getting their investment back. They have a higher claim on the company’s assets, but they are still below bondholders and other creditors.

Unlike regular shareholders, preference shareholders often have limited or no voting rights. This means they may not have the same power to make decisions about the company as regular shareholders.

However, preference shares don’t typically have the same potential for earning higher profits compared to regular shares. While regular shareholders can benefit from the company’s growth and increased stock value, preference shareholders generally do not enjoy those benefits to the same extent.

Some preference shares may have the option to be converted into regular shares at a predetermined rate, allowing the shareholders to switch to regular shares and potentially benefit from the company’s success. Additionally, some preference shares can be redeemed or repurchased by the company at a specific future date or under certain conditions.

It’s important to remember that the terms and rights associated with preference shares can vary between companies. If you’re considering investing in preference shares, it’s a good idea to carefully review the terms and seek advice from a financial professional to fully understand the benefits and risks involved.