Question

Write two characteristics of Preference Shares.

Hint:

Preference shareholders get priority in dividends and repayment during liquidation.

Answer 1

Preference shares have certain special characteristics that distinguish them from equity shares. First, preference shareholders receive a fixed rate of dividend before any dividend is paid to equity shareholders. This ensures priority in the distribution of profits. Second, in case the company is wound up, preference shareholders get repayment of capital before equity shareholders, giving them greater security. Preference shares may also carry cumulative or non-cumulative rights, meaning unpaid dividends may or may not accumulate. They may be redeemable or convertible depending on the company's terms. These characteristics make preference shares a hybrid form of financing with both equity and debt features.