The Classes of Preference Shares

by Dana Griffin
Preference shares can bring new investors through special incentives without affecting current shareholders.

Preference shares can bring new investors through special incentives without affecting current shareholders.

"Preference stock" denotes a class of preferred stock that is subordinate to regular preferred stock but senior to common stock during dividend payouts. Companies use preference shares when they don't have enough preferred stock, usually owing to limitations outlined in their other agreements or their articles of incorporation. Preference shares allow companies to raise money without diluting current investors' stocks or diving into debt.

Common Characteristics

Some characteristics are common to all preference shares. First, most preference shares are non-voting; investors accumulate income but have no voice regarding the company's function. Secondly, unlike debt holders, preference shareholders must forgo any legal action if the company is unable to pay its dividends. If the company cannot pay dividends to preference shareholders, it cannot pay on any other shares. When no one receives a payout, preference shareholders gain equal voting rights with normal shareholders. Most preferred stock is cumulative. If the company cannot pay its dividends, they carry to the next quarter. At that time, the company must pay the holdover in addition to the current dividend.

Convertible Shares

Investors who buy convertible shares enjoy the right to convert them to common stock. The investor's original agreement terms define the date or waiting period of eligibility for conversion. The agreement also outlines the rate of conversion, which is a fixed percentage and therefore a secure amount.

Participating Preference Shares

Purchasing participating preference shares ensures that the shareholders receive supplemental dividends along with their normal dividends. A company's articles define the excess dividends as a fraction of dividends declared on ordinary shares. All other classes of preferred stock receive payment before participating preference shareholders.

Redeemable Preference Shares

Redeemable shares are shares that companies may repurchase later at a set price. At an agreed upon date, the company may offer to purchase the shares, and shareholders are required to accept the offer. In this instance, the company must pay the set price plus the accumulated dividends.

Trust Preference Stocks

To absorb corporate debt, some companies create a trust. The trust accrues interest payments on the debt from the company and pays these as dividends to a security holder. It is important to remember that these stocks are not eligible for lower dividend tax rates. Companies customarily design their dividend payments to award these stockholders first.

About the Author

Dana Griffin has written for a number of guides, trade and travel periodicals since 1999. She has also been published in "The Branson Insider" newspaper. Griffin is a CPR/first-aid instructor trainer for the American Red Cross, owns a business and continues to write for publications. She received a Bachelor of Arts in English composition from Vanguard University.

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