1. Introduction : When public limited companies want to raise capital by inviting the public to purchase shares, they often issue different types o1 preference shares. As compared to the equity shares, the preference shares have certain special characteristics. The investors who want the safety of their investment and regular income prefer to invest in preference shares.
2. Meaning of Preference Share : These types of shares are called preference shares because as compared to the ordinary shareholders, the preference shareholders are given first preference both at the time of the distribution of the dividend and refund at the time of dissolution of the company.
As per the Companies Act, “Preference shares are such shares which qualifies a priority in getting dividend out of the profits of the company and also priority to be refunded the capital at the time of dissolution of the company are acknowledged as the prefererfce’-share.”
3. Characteristics of Preference Shares : The characteristics of preference shares are as follows:
(1) Priority of dividend: Preference shareholders have priority in getting dividend at fixed rate over equity shareholders.
(2) Refund of Share Capital: Preference shareholders have priority in getting refund of share capital at the time of liquidation or dissolution of the company.
(3) Fixed Dividend : The dividend rate on the preference shares is fixed.
(4) Voting Rights : The preference Shareholders have a right to vote only for the matters which are concerned with their subject.
(5) Conversion : If there is a provision in Articles of Association, the preference shares can be converted into equity shares.
(6) Market price : Usually market price of preference share is fixed. The market price of such share changes as per the change in interest rate structure.
(7) Risk factor: In such share priority in dividend and refund of share capital over equity shareholder makes it less risky.
(8) Investor’s Choice : The investors who wants stable fix income and safety of capital, purchase such type of shares.
4. Conclusion : There is a stability in the market price of preference share as the rate of dividend on such share is fixed. Thus, the speculators do not take interest in this type of share. The investors who wants safety of capital invest in this type of Share.