To discuss about the types of Preference shares we found that there are 8 different types of preference shares in the business world, they are shortly discussed as follows:
Types of Preference Shares:
- Cumulative preference shares
- Non-cumulative preference shares
- Participating preference shares
- Non-participating preference shares
- Convertible preference shares
- Non-convertible preference shares
- Redeemable preference shares
- Non-redeemable preference shares
Cumulative versus non-cumulative preference shares:
Where a preference share is cumulative, if a dividend is not declared in a particular year, the right to the dividend is not lost but carries over to a following year. The dividends are said to be in arrears. With non-cumulative shares, if a dividend is not paid in a particular year, the right to that dividend is lost.
Participating versus non-participating preference shares:
A participating share provides the holder with the right to share in extra dividends. For example, if a company has issued 10% participating preference shares and it pays a 12% dividend to the ordinary shareholders, the preference shareholders may be entitled to a further 2% dividend.
Convertible versus non-convertible shares:
- Convertible preference shares may give the holder the right to convert the preference shares into ordinary shares. The right to convert may be at the option of the holder of the shares or at the option of the company itself. Convertible preference shares may need to be classified into debt and equity components.
- converting preference shares. With convertible preference shares, whether a conversion into ordinary shares ever occurs depends upon the exercise of an option, but with converting preference shares the terms of issue are such that the shares must convert into ordinary shares at a specified point of time. Converting preference shares may need to be classified as debt.
Redeemable versus non-redeemable shares:
- Subsequent to their issue, redeemable preference shares may be bought back from the shareholders by the company at a price generally established in the terms of issue of the shares. The option to redeem is normally held by the company. Different types of preference shares are there in the business world which allowed the company to raise funds when necessary.