preference shares

Definition
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preferred stock. Read more: http://www.investorwords.com/3775/preference_shares.html#ixzz2Kg8cdKe2

Types of Preference Shares In general, there are four different types of preference shares (preferred stocks): 1) Cumulative and Non cumulative shares: Cumulative preference shares give the right to the preference shareholders to claim the dividends that are not paid in the previous year and they are paid in preference to ordinary dividends. For non-cumulative or simple preference shares, any dividends that are unpaid or accrued in the previous year cannot be carried forward to the subsequent year or years in respect of that year, and that is considered lost by the shareholders. 2) Redeemable and Non-redeemable: A redeemable preference share is issued on the terms where they are liable to be redeemed at either a fixed time, or the company's option or at the shareholders option. In other words, the company can buy back preference shares at an agreed time and price. Non-redeemable or Irredeemable preference shares need not be repaid by the company except on winding up of the company. The company is not offering to buy back the securities.

3) Convertible and Non-convertible shares: Convertible Preference Shares are corporate fixed-income securities that the shareholders have the option of converting them into a certain number of ordinary shares after a predetermined time span or on a specific dat.Non-Convertible Preference Shares are those which do not have the option of their conversion into the equity shares. 4) Participating and Non-participating Participating Preference Shares are entitled to a fixed preferential dividend and have the right to participate further in the surplus profits after payment of certain rate of dividend on equity shares. A non-participating share is entitled to fixed rate of dividend only. They do not have such rights to participate or claim for a part in the surplus profits of a company.

Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. The earnings of a corporation are applied to this payment before common stockholders receive dividends. If corporate earnings are insufficient for the fixed annual dividend, the preferred stock will absorb the total amount of earnings, and the common stockholders will be precluded from receiving a dividend. When corporate income exceeds the amount that is needed to pay preferred stockholders, the remainder is generally paid to common stockholders. In special situations, the remainder may be distributed pro rata to both classes of stock, in which case the preferred stock is said to "participate" with the common stock. Preferred stock can be cumulative or noncumulative. If it is cumulative and if the fixed dividend remains unpaid, it becomes a debit upon the surplus earnings of succeeding years. Accumulated dividends must be paid in full before common stockholders can receive dividends. When preferred stock is noncumulative, its preference is extinguished by the failure of the corporation to have sufficient earnings to pay the fixed dividend in a given year.

Definition of 'Preferred Stock'

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".

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