Preference shares are also known as preference stocks.
A limited company issues these shares only after equity shares.
The persons who receive preference shares are called preference shareholders.
Generally, these shareholders have preference rights in dividend received.
Dividend rates are pre fixed.
Preference shareholders get dividend after interest on debenture but before equity shareholders.
At the time of winding up, preference shareholders get money after all the debts but before equity shareholders.
Preference share have various type. They are:
If company cannot earn profit for dividend in any financial year, those arrears dividends are accumulated for next year when company earns profit.
If Article of Association (internal rules and regulation of the company) of the company is silent about the accumulated dividends, it is assumed that such shares are cumulative.
If company cannot earn profit for dividend in any financial year, those arrears dividends are not accumulated for next year, it is known non-cumulative preference shares.
These preference shareholders cannot get arrears dividend for next year.
According to article of association, these shares can be redeemed (buy back) after expired date.
The terms and condition of the redemption is specified at the time of issuing.
These types of shares can be redeemed only at the time of liquidation of the company.
Capital amount of the shares is not paid back to shareholders before winding up of the company.
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These types of shares can be converted into another preference shares, equity shares or debentures if mentioned in Article of Association.
These converting may be at par, at discount or at premium.
All the terms and conditions are mentioned at the time of issuing.
These types of shares cannot be converted into another preference shares, equity shares or debentures except if not stated.
These shareholders can get extra/surplus dividend if there remains some dividend after providing dividend to equity shareholders
If article of association is silent, these shareholders cannot get extra/surplus dividend.
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