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:

Description

Debit

Credit

Bank

200,000

 

Preference Shares

 

200,000

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.

One thought on “Preference Shares or Preferred Stock”

  1. rxoc mining says:

    good article very hopeful

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