3. Preference Shares
Preference shares are used to raise additional capital for a company and could have many rules as to how they are to be paid back or retained. They may be viewed as a loan. As a rule, preference shareholders do not take part in the active management of a company. Preference shares can also be converted into other classes of shares as well as ordinary shares.
There are different kinds of preference shares which could be accumulative, non-cumulative, participating and or redeemable. They are all alike in that their dividend distribution must take place before any other profits of the company takes places.
Holders of cumulative preference shares are entitled to a dividend each year before the holders of ordinary shares get their dividends. If a company is unable to make this payment then they will be paid first out of the next year’s profits. Cumulative means the dividends accumulate until they are paid out.
Where the shares are non-cumulative, if a dividend is not paid there is no right to have arrears made good in the following year.
There are all kinds of terms and conditions that go with preference shares. If you have an interest in these shares, please look at examples on the web. Most of the banks have issued preference shares in the past.