Preference share

Preference or preferred shares are shares in a company that have a fixed rather than a variable dividend. They have a prior claim on income to ordinary shares – dividends on preference shares must be paid first.

If a company is wound up, preference shareholders are normally entitled to be paid a share of any proceeds (after all debts have been paid off) before the ordinary shareholder gets anything. Most preference shares also have a cumulative clause, meaning that if, for any reason, a company suspends the fixed dividends, they still accumulate and must be paid out as soon as the company can afford to do so. All this means that preferred share are a relatively more secure investment than ordinary shares, in terms of both income and capital.

The downside, however, is that as the dividend is set and does not rise – or fall – along with profits, preference shareholders do not share in the rising prosperity of a company. The shares also tend to come with restricted voting rights.

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