Preference Shares

Preference shares offer their owners preferences over ordinary shareholders. There are two major differences between ordinary and preference shares:

• Preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not.
• Preference shareholders cannot normally vote at general meetings.

The preference dividend is fixed in the sense that preference shares are often issued with the rate of dividend fixed at the time of issue and you might see something like this:

'4% preference dividend £0.25'

This is a preference share with a nominal value of £0.25 per share that carries a dividend of 4%, that is 4% of £0.25 every year for every share issued. If a company has issued 100,000 of these shares at par then it will have received:

£100,000 x £0.25 = £25,000 from shareholders on issue

It will pay an annual dividend of:

£25,000 x 4% = £1,000 each year.

Note, that if by any chance a company cannot pay its preference share dividend then it cannot pay any ordinary share dividend since the preference shareholders have the right to receive their dividend before the ordinary shareholders under all circumstances - hence the term 'preference'.
Preference shares are usually cumulative and this means that if this year's dividend wasn't paid, then it will be carried forward to next year. So that if the £1,000 for 2004 was missed, then preference shareholders will receive £2,000 in 2005 (assuming the company is in a position to pay the dividend!).

A preference share may be redeemable which means that at some time in the future, the company will effectively buy it back. How do we know that a share is redeemable? Redeemable shares usually look like this:

'4% cumulative preference share of £0.25, 2007'

This means that the £0.25 per share preference share carries the right to a 4% dividend and it will be redeemed in 2007 - normally the date for redemption in 2007 will be agreed when it is issued so you will know well in advance when to expect your money back.

If a preference share is a participating preference share then the owner of such a share has the right to participate in, or receive, additional dividends over and above the fixed percentage dividend discussed above. The additional dividend is usually paid in proportion to any ordinary dividend declared.
Finally, preference shares may be convertible. If the shares are convertible then the shareholders have the option at some stage of converting them into ordinary shares.