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What are Preference Shares?

Do you like it when you get a special treatment compared to others? We’re sure you do...

Preference shares are somewhat like that. These are the shares which have a special treatment.

A firm issues preference shares to raise capital. This becomes part of the preference share capital.

Preference shares represent ownership in a company. Shareholders of preference shares enjoy the preference over common shareholders in this case.

Suppose a company goes bankrupt and files for bankruptcy. Now, preferred shareholders will get the first preference and receive the company’s assets before common shareholders get their share.

Not just assets, preference shareholders receive dividends, share of profits, etc. before the common shareholders.

Preference shares can also be converted into equity shares. Some shares can be converted while some need prior approvals and permissions.

An important point here is that even though preference shareholders have the right to share company’s earnings, dividend first, they do not have voting rights like the equity shareholders.

There are various types of preference shares. Some of the types include:

  • Convertible preference shares
  • Non-convertible preference shares
  • Redeemable preference shares
  • Cumulative preference shares
  • Non-cumulative preference shares

Check out Equitymaster’s series on how to invest in the stock market. Here, you will receive all the basic information which will help you get started in the world of investing.

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