Preference Shares or Preferred Stock

Preference shares also called preferred stock are a mode of raising capital through existing shareholders or the general public without affecting the shareholding structure. As discussed earlier, preference shares have the following features:

• Preference shareholders are given priority over ordinary shareholders in claiming the net assets of the company in case of liquidation of the Company
• Preference shareholder does not have voting rights
• Preference shares may be entitled to a fixed dividend or interest

For example, if a company raises $ 200,000 through the issuance of 200,000 preference shares of $ 1 each, the transaction will be recorded as follows:

Further variations of preference shares

• Cumulative preference shares

Preference shareholders are typically entitled to a fixed dividend or interest. If Company is unable to pay dividends due to cash constraints in any year or over a period, that dividend will be accumulated and paid before paying dividends on ordinary shares. 

• Convertible preference shares

Companies may issue preference shares with a convertibility option which entitles the holder of preference shares to convert his/her shares into ordinary shares at a specific future date.