Preference Share
Preference share is that type of share which has generally fixed dividend rate and may redeemable and irredeemable in nature. It also provides its holders the preferential rights over equity share. So, preference shareholders get dividend before equity shareholders. They have also given priority at the time of company liquidation as well. It is called hybrid security since it consists the features of debt instruments like fixed and certain return, maturity period, etc. and the features of equity like return as a dividend from net profit, no obligation to pay dividend if loss etc.
Cumulative and Non-Cumulative Preference Share
The ultimate goal of the company is to earn profit. But it is not always possible to make sufficient profit for distribution of dividend due to various reasons. Cumulative preference share is that type of preference shares on which in arrears dividend (i.e. past years’ unpaid dividends) amount is accumulated and paid whenever the company earns sufficient profit.
Non-cumulative preference shares are that type of preference shares on which the company is not liable to pay in arrears dividend.
Participative and Non-participative Preference Shares
Participative preference shares are those preference shares that provide its holder the right to claim on company’s profit along with the fixed dividend as per the terms and conditions mentioned in the agreement. By purchasing the participative preference shares the preference shareholders can participate on the extra earnings along with the fixed dividend. All the preference shares except participative preference shares are called non participative preference shares.
Non-participative preference shares do not provide right to its holders to make claim for extra earning. It’s holders only get fixed dividend.
Convertible and Non-Convertible Preference Shares
Convertible preference shares are those preference shares which provides its holders the right to convert it in to the specified number of common stocks at present price within specified time period. By investing in these type of preference shares, you will get chance to be an owner of the company. Generally, these preference shares have lower dividend rate.
On the other hand, non-convertible preference shares are those preference shares which do not have option for conversion in to common stock.
Redeemable and Irredeemable Preference Shares
Those preference shares that are repaid to the preference shareholders after certain time specified in the contract are called redeemable preference shares. On the other hand, Irredeemable preference shares are those preference shares which are not repaid to its holders in the normal course of business operation.