What are Preference Shares

Preference shares are one of those quiet, steady investments. They don't make headlines like flashy IPOs or soaring tech stocks, but for investors who value priority, fixed income, and a little extra peace of mind, preference shares offer something really special.
In this blog, we'll walk you through what preference shares are, why they exist, how they work, and whether they might be the right fit for your investment strategy

If you’ve ever wondered what preference shares are, how they’re different from the "regular" shares (also called equity shares), or whether they could have a place in your investment portfolio — you’re in the right place.
Let's break it down together, in simple, relatable terms

What is Preference Share?

Imagine you and a group of friends decide to invest in a small bakery.
Everyone pitches in money and agrees to split profits based on how much they invest. But one friend, Rahul, says,
"Hey, I’ll invest too — but I want two special conditions: I get paid first when profits are distributed, and if the bakery ever shuts down, I want to be among the first to get my money back."

That’s basically what preference shareholders do.

Preference Shares (sometimes called preferred stock in other countries) are a special class of shares that give investors priority over ordinary shareholders when it comes to:

• Receiving dividends (the share of the company's profits)
• Getting capital back if the company shuts down or is liquidated

In return for this special treatment, preference shareholders often give up something important:
the right to vote on company matters — or at least, they have very limited voting rights compared to regular shareholders.

Key Features of Preference Shares :-

1. Priority Dividend Payment

Preference shareholders get their dividends before equity shareholders do.
If the company decides to distribute profits, preference shareholders are first in line.

Imagine a company only has enough profits to pay one group of investors this year. Who gets it?
The preference shareholders.

2. Fixed Dividend

Unlike regular shareholders whose dividends go up and down based on company profits, preference shareholders often receive a fixed dividend.
It’s like earning a stable income from your investment, much like interest from a bond.

 

3. Priority in Asset Repayment

If a company closes down, its assets are sold to pay debts.
Preference shareholders get their money back before equity shareholders — although banks and creditors still come first.

4. Limited Voting Rights

Most preference shareholders don’t get to vote on everyday company matters.
However, if the company doesn't pay dividends for a certain period, preference shareholders may gain voting rights temporarily.

Types of Preference Shares You Should Know About

Not all preference shares are created equal.
There are several types — and understanding them can help you make smarter decisions:

a) Cumulative vs Non-Cumulative

• Cumulative Preference Shares: If the company skips paying a dividend in one year, the unpaid amount is carried forward to the next year. You don’t lose out.
• Non-Cumulative Preference Shares: If the company doesn’t pay dividends one year, tough luck — you don't get that money later.

b) Redeemable vs Irredeemable

• Redeemable Preference Shares: The company agrees to buy back the shares at a later date (like a repayment).
• Irredeemable Preference Shares: These shares continue indefinitely unless the company winds up.

(Important Note: In India, companies must issue redeemable preference shares — irredeemable ones are not permitted.)

c) Participating vs Non-Participating

• Participating Preference Shares: In addition to fixed dividends, shareholders might also get extra profits if the company does exceptionally well.
• Non-Participating Preference Shares: Only the fixed dividend, nothing extra.

Why Do Companies Issue Preference Shares?

If you’re wondering why a company would offer such "special treatment" to some investors, here’s the simple answer:

It’s a win-win.

• Companies raise money without giving up control (since preference shareholders usually don’t vote).
• It’s often cheaper than raising money through loans.
• Preference shares don’t affect the ownership structure dramatically, unlike issuing more equity shares.

In short: companies get the funds they need, and investors get a relatively stable, priority-based return.

Should You Invest in Preference Shares?

Good question.

Preference Shares might be a smart choice for you if:

• You like steady income and don’t want the unpredictability of regular equity shares.
• You don’t mind limited control over the company (since voting rights are minimal).
• You’re looking for lower risk compared to pure equity investments but higher returns than a fixed deposit.

However, they might not be ideal if:

• You’re chasing high growth (equity shares offer bigger potential gains over time).
• You want full ownership benefits like voting rights.
• You need instant liquidity — preference shares aren't always easy to sell quickly like normal stocks.

Real-Life Example to Make It Even Clearer

Let’s say Company ABC issues preference shares with a fixed 8% annual dividend.

• If you invest ₹1 lakh in these shares, you can expect ₹8,000 every year as income — assuming the company is doing okay financially.
• Meanwhile, ordinary shareholders might get more or less, depending on how much profit the company makes — or sometimes, no dividend at all.

In tough times, even if the company struggles, your dividend has priority over the dividends of ordinary shareholders.
And if the company shuts down, you’ll be nearer to the front of the line to get your money back.

Final Thoughts: The Quiet Power of Preference Shares

In a world obsessed with high-risk, high-reward investments, preference shares quietly offer a balance many investors need but often overlook.
They bring stability, priority, and a sense of security — especially valuable during unpredictable times.

Of course, no investment is completely risk-free. Companies can still fail. Dividends can still be skipped.
But for someone looking for a middle path — between the safety of debt and the excitement of equity — preference shares can be a smart, thoughtful choice.

Next time you're building or reviewing your portfolio, maybe — just maybe — give preference shares a little more attention.
They might just be the steady companion your investment journey needs.