Question

How many kinds of preference share are there?

Hint:

Remember the four pairs of preference shares based on their features: Dividend accumulation (Cumulative/Non-Cumulative), Repayment (Redeemable/Irredeemable), Profit sharing (Participating/Non-Participating), and Conversion (Convertible/Non-Convertible).

Answer 1

Preference shares, also known as preferred stock, can be classified into different types based on their features. The main kinds are:

Cumulative and Non-Cumulative Preference Shares:
Cumulative: If the company does not make enough profit to pay the preference dividend in a particular year, the unpaid dividend (arrears) accumulates and must be paid in future years before any dividend is paid to equity shareholders.
Non-Cumulative: The right to receive a dividend for a year lapses if the company does not declare it in that year. Arrears do not accumulate.

Redeemable and Irredeemable Preference Shares:
Redeemable: These shares are issued for a fixed term, and the company must repay the capital amount to the shareholders at the end of that term. In many countries, like India, companies are only allowed to issue redeemable preference shares.
Irredeemable (Perpetual): These shares are not repaid during the lifetime of the company. The capital is returned only upon the winding up of the company.

Participating and Non-Participating Preference Shares:
Participating: These shareholders are entitled to their fixed dividend and also have the right to share in the surplus profits of the company (after paying the equity dividend) along with the equity shareholders.
Non-Participating: These shareholders are only entitled to their fixed rate of dividend and do not have a right to any surplus profits.

Convertible and Non-Convertible Preference Shares:
Convertible: The holders of these shares have the right to convert their preference shares into equity shares at a predetermined rate after a specified period.
Non-Convertible: These shares do not carry the right of conversion into equity shares.