Preference shares provide an interesting investment option to new investors and people who want portfolio diversification. Although preference shares are less common in the market than regular equity shares, their stability attracts many investors.
When you consider the need for protected investment income and restricted market risk exposure, preference shares are a strong investment solution.
Preference Shares Offer Investor Priority
What are preference shares? The investment instrument known as preference shares or preferred stock gives privileges beyond conventional shares to its holders. The most important benefit of preference shares is that owners get ahead of other shareholders during dividend distribution.
A company distributes profits that grant preference shareholders payment before common shareholders. But that’s not all. Preferred shareholders get priority over common shareholders if the company shuts down or goes bankrupt. This advantage is helpful, especially in uncertain markets.
Why Do People Invest in Preference Shares?
Many experienced investors prefer preference shares, especially those who prefer a low-risk, income-based approach. Here’s why:
- You get fixed dividends at regular intervals.
- You don’t have to worry too much about market swings.
- Your earnings are more predictable than with common stocks.
- You’re paid first when it comes to dividends or liquidation.
Key Features of Preference Shares
Let’s simplify the core features of preference shares so you know exactly what to expect:
| Feature | Why It Matters |
| Fixed Dividends | The regular payments work like monthly salaries, giving you a steady income. |
| Priority in Payments | Dividends and distribution payments occur before common shareholders under dividend payouts and bankruptcy proceedings. |
| No Voting Rights | Running your business involves no voting privileges regarding corporate decisions unless your goals agree or disagree with this situation. |
| Convertible or Callable | Equity shares, along with selected shares, enable the company to repurchase them at a later point. |
| Lower Risk Profile | Stability-seeking investors find this option most suitable. |
Types of Preference Shares
When you explore the market, you’ll come across several types of preference shares. Each one has its own rules:
| Type | What It Means |
| Cumulative Preference Shares | Missed dividends are added up and paid later. You never lose them. |
| Non-Cumulative Preference Shares | Dividends are paid only if the company earns a profit. Missed payments are not carried forward. |
| Redeemable Preference Shares | The company can buy these back after a specific time. |
| Irredeemable Preference Shares | You hold these shares until the company is liquidated |
| Participating Preference Shares | You get extra dividends, plus your regular dividend, if the company does well. |
| Non-Participating Preference Shares | You only get the fixed dividend—no share in extra profits. |
| Convertible Preference Shares | You can switch these into common shares later if the price goes up. |
| Non-Convertible Preference Shares | These stay as preference shares permanently. |
| Callable Preference Shares | The company can repurchase them at a fixed price and time |
| Adjustable Rate Preference Shares | Dividend rates go up or down based on market interest rates. |
Cumulative Preference Shares: A Popular Pick
Cumulative shares are especially popular because they offer protection against missed dividend payments. If a company skips dividends this year, it still owes them to you next year, and sometimes with interest.
Here’s a quick way to understand how they’re calculated:
Quarterly Dividend = (Dividend Rate * Face Value) ÷ 4
Total Missed Dividend = Quarterly Dividend * Number of Missed Quarters
Advantages of Preference Shares
There are several advantages of preference shares that make them stand out:
- Steady Income: You can receive a regular fixed dividend through these shares.
- Low Volatility: Such instruments experience less market fluctuation.
- Priority in Earnings: You get paid first, both in profits and if the company winds up.
- Convertible Options: You can convert specific types of preference shares into their common stock when prices rise.
- Fits Conservative Portfolios: People who prioritise long-term investments using low risks tend to find preference shares advantageous for their portfolios.
Disadvantages of Preference Shares
Every investment has its downsides, and preference shares are no exception. Let’s look at the disadvantages of preference shares, too:
- No Voting Rights: Business decisions remain out of reach since you lack voting rights as a preferred share owner.
- Capped Profits: Participating in shares is the only way to gain additional profits from company success when holding preference shares.
- Dividend Risk: Some types of dividend shares (non-cumulative) do not ensure payment of missed distributions if circumstances arise.
- Inflation Reduces Value: Fixed income gives the same amount over time, but rising prices lower its real worth.
- Lower Returns in Bull Markets: When the stock market rises, equity shares usually grow faster than fixed-income investments.
Why Choose Preference Shares for Stability and Growth
People seeking dependable returns with minimal risks should consider investing in preference shares. Preference shares are an intermediary between bonds and stocks since they provide consistent income and attractive capital growth possibilities.
A diversified portfolio must begin with preference shares to provide stability, whether you invest for the long term or are just starting to invest.
