What are preference shares or preferred stocks?
Preference shares (sometimes called preferred shares) are a class of stock that gives holders priority rights to dividends and, in certain cases, to the distribution of company assets.
If a business pays dividends, preference shareholders are usually entitled to receive theirs before ordinary shareholders. Similarly, if a company goes into liquidation, preference shareholders are prioritised when remaining assets are distributed.
Preference shares combine features of both equities and fixed-income securities. They may appeal to investors who value predictable income, since they typically offer fixed dividend payments (if granted by the company). However, as with any equity, these payments aren’t guaranteed and depend on the firm’s financial health and dividend policy.
Unlike bonds, preference shares can be traded on an exchange and may also qualify for more favourable tax treatment than bond interest, depending on individual circumstances. Learn more about what shares are and how they work.
How do they work?
Preference shares sit between bonds and ordinary shares in a company’s capital structure. They typically offer fixed dividends (if declared by the company) and priority rights to payments ahead of ordinary shareholders.
In practice, this means holders may receive income more predictably than ordinary shareholders, though their dividends aren’t guaranteed, and they usually don’t have voting rights. In the event of liquidation, preference shareholders are paid after bondholders but before ordinary investors.