Preference shares

Preference shares can be considered a sort of hybrid. They give holders similar rights over a company’s affairs as ordinary shares (equities), but commonly holders do not have a vote at meetings; like bonds they get specified payments at predetermined dates. The name spells out their privileged status, since holders are entitled to a dividend whether there is a profit or not, which makes them attractive to investors who want an income. In addition, for some there is a tax benefit to getting a dividend rather than an interest payment. No dividend is allowed to be paid on ordinary shares until the preference holders have had theirs. They rank behind debenture holders and creditors for pay-outs at liquidation and on dividends. If the company is so hard up it cannot afford to pay even the preference dividend, the entitlement is ‘rolled up’ for issues with cumulative rights and paid in full when the good times return. Holders of preference shares without the cumulative entitlement usually have rights to impose significant restrictions on the company if they do not get their money. Sometimes when no dividend has been paid the holders get some voting rights.

Like ordinary shares they are generally irredeemable, so there is no guaranteed exit other than a sale. If the company folds, holders of pref­erence shares rank behind holders of debt but ahead of the owners of ordinary shares. There are combinations of various classes of paper, so for instance it is not unknown for preference shares also to have conversion rights attached, which means they can be changed into ordinary shares.

Source: Becket Michael (2014), How the Stock Market Works: A Beginner’s Guide to Investment, Kogan Page; Fifth edition.