Types of Preference Shares

Types of Preference Shares

Preference shares are issued with promise of fixed dividend.  Preference shares may be classified in terms of dividend accumulation (cumulative and non cumulative preference shares) and in term of redemption (redeemable & irredeemable preference shares).

1.    Cumulative Preference Shares

Cumulative preference share are entitled to receive the dividend in future, if company fails to pay dividend in a particular year. It means dividend is accumulated till the time of payment. Companies normally issue cumulative preference shares, because these shares have more acceptability ratio in the market.

2.    Non cumulative Preference Shares

Non cumulative preference shares dividend does not accumulate and lapse in case of nonpayment. These shares are rarely issued by the company, because investors are not interested in theses shares due to high risk of nonpayment of dividend.

3.    Redeemable Preference Shares

Preference shares are redeemed (buy back by company) at or after some future date.  Companies normally issue redeemable preference share, because most of the investor want to receive their original investment back.

4.    Irredeemable Preference Shares

Irredeemable share are never buy back by the companies. It means you can only receive divided for indefinite period, but investor cannot take back the original investment. These types of shares are offered with very high rate of return.