What is preferred stock/preference share?
Preference shares, also known as preferred stock, are shares of a company’s stock that take precedence over common stock or ordinary shares.
The main features of preference shares or preferred stock are that they receive preference in dividends, can be exchanged before maturity, don’t have voting rights and can be easily converted to common stock.
Where have you heard about preferred stock/preference share?
As preference shares, or preferred stock, are a hybrid of a bond and a security, they offer more benefits and stability to investors. This makes them a preferred choice for investors looking to minimise risk.
Typically, venture capitalists looking to fund start-up companies invest in preference shares or preferred stock.
What you need to know about preferred stock/preference share.
There are various types of preference share/preferred stock. The main types are:
Cumulative – the company must cumulate all dividends and pay them to the preference share/preferred stock holder (usually at the end of that year), as long as the company is in profit.
Non-cumulative – the company is not obligated to cumulate and pay dividends that they may have missed during any periods in which they made a loss.
Participating – as well as receiving fixed dividends, this type of share participates in company profits with equity shareholders.
Non-participating – these shares do not participate in company profits, they only receive fixed dividends.
Convertible – shareholders have the option to convert their preference share/preferred stock into common shares.
Non-Convertible – these shares do not give the shareholder the option to convert to common shares.
Redeemable/callable – the company uses a call option to set a date and price at which they can buy the shares back from the shareholder.