Question

What are preference shares?

What do you mean by a preference share?

Answer 1

As the name indicates, these shares have certain preferential rights distinct from those attached to equity shares. The shares that carry the following preferential rights are termed preference shares:

1. A preferential right as to payment of dividends during the life time of the company.
2. A preferential right as to the return of capital in the event of the winding up of the company.

The holder of a preference share has a prior right to receive a fixed rate of dividend before any dividend is paid to equity shares. The rate of dividend is prescribed at the time of issue.

Normally, preference shares do not carry any voting power. They have voting rights only on matters which affect their interest, such as selling of undertakings or changing rights of preference shares, etc., or they get voting rights if a dividend remains unpaid.

The preference shareholders are co-owners of the company but not controllers. These shares are purchased by cautious investors who are interested in the safety of investment and who want steady returns on investments.