November 11, 2025
4 mins read
Preference Shares are a special type of stock that give shareholders priority when it comes to dividend payments. Holders of preference shares receive dividends before equity shareholders. However, unlike normal shares, they are usually not offered to the general public.
For investors, preference shares provide fixed income with lower risk compared to equity shares. For companies, they are a way to raise funds without creating extra debt. This article explains preference shares meaning, how they work, their features, and their advantages and disadvantages.
Preference shares meaning is that they are a type of equity share that comes with preferential rights over ordinary shares. These rights usually include:
Priority in receiving dividends at a fixed rate.
First claim on company assets in case of bankruptcy (after creditors are paid).
The main drawback is that holders of preference shares do not usually get voting rights in the company, unlike equity shareholders.
Preference shares give investors priority in two areas:
Dividend Payments – paid first at a fixed or pre-decided rate (quarterly or annually).
Liquidation Claims – in case the company closes, preference shareholders are paid before equity holders but after creditors.
Companies may issue different types of preference shares like convertible, callable, or adjustable rate. These provide investors flexibility, predictable returns, and stability, while limiting their influence on company management.
Preference shares combine the characteristics of both equity and debt. Some key features are:
Dividends are given to preference share holders first, usually at a fixed rate. In cumulative shares, unpaid dividends carry forward. In non-cumulative shares, unpaid dividends are lost.
Most preference shares do not give voting rights. However, shareholders may gain limited voting power in special cases, such as when dividends are unpaid for a long period.
Preference shares act like fixed-income securities because dividends are regular and predictable. This makes them attractive to investors who prefer stability over high risk.
Some preference shares are redeemable, callable, convertible, or adjustable. These options give investors flexibility—whether they want guaranteed exit dates, protection against interest rate changes, or a chance to convert into equity later.
Preference shares play an important role for both companies and investors:
Provide steady income through fixed dividends.
Offer dividend and asset priority over equity shareholders.
Help companies raise funds without losing control of voting rights.
This makes preference shares a hybrid investment tool, balancing stability for investors and capital needs for businesses.
Dividends not paid in one year carry forward and must be paid in future years before equity shareholders receive anything.
Dividends are only paid from current year profits. If no profits exist in that year, shareholders get nothing and cannot claim arrears later.
These can be redeemed (bought back) by the issuing company after a set period, offering flexibility to the business.
These cannot be redeemed during the company’s lifetime, only at liquidation.
These allow holders to convert their preference shares into equity after a certain time at a fixed conversion rate.
These cannot be converted into equity but still provide preference in dividends and capital repayment.
These give holders a share of surplus profits in addition to fixed dividends, but only after equity shareholders are paid.
These only provide fixed dividends and no share of extra profits.
Companies can repurchase these shares at a set date and price. They usually pay higher dividends but may be called back early.
Dividend rates move with market interest rates, protecting investors against inflation but also lowering payouts when rates fall.
Here’s a quick table showing the advantages and disadvantages of Preference Shares:
Aspect | Advantages of Preference Shares | Disadvantages of Preference Shares |
Dividend | Fixed and regular dividends, offering steady income | Dividend payments depend on company profits; non-cumulative shares may miss dividends |
Risk | Safer than equity shares; lower volatility | Still riskier than bonds; dividends not guaranteed |
Priority | Higher claim on assets than equity holders | Lower claim compared to creditors and bondholders |
Voting | No dilution of company’s control; investors accept limited voting rights | Investors have little say in company decisions |
Flexibility | Convertible, callable, or adjustable features provide investment choice | Complex features may confuse new investors |
When selecting preference shares, keep these points in mind:
Dividend type: Choose cumulative if you want arrears guaranteed, or non-cumulative if you accept risk.
Exit features: Callable shares may be repurchased early; non-callable shares give more stability.
Income preference: Fixed-rate shares offer stability, adjustable-rate shares suit inflation protection.
Conversion needs: If equity participation matters, go for convertible; else, non-convertible shares provide steady income.
Investing in preference shares is simple with a Demat and trading account:
Check issuer credentials: Review the company’s financial health and credit ratings.
Use broker account: Buy listed preference shares on stock exchanges.
Match goals: Choose the share type (fixed, adjustable, redeemable) as per your income needs.
Monitor investments: Keep track of dividend dates, redemption options, and company updates.
Feature | Preference Shares | Equity Shares |
Dividend | Fixed or adjustable, paid before equity | Variable, depends on profits |
Voting Rights | Usually none, except special cases | Full voting rights |
Asset Claim | Higher than equity, lower than creditors | Last priority during winding up |
Upside | Limited, mostly through dividends | High upside from price growth |
Risk Level | Moderate, lower volatility | High, with greater market risk |
Convertibility | Available in some types | Not applicable |
Additional read: What Are Shares
Preference shares are an excellent option for investors seeking stable income and moderate risk. They combine features of both equity and debt, making them a unique hybrid investment.
Companies benefit by raising capital without giving away management control, while investors enjoy fixed dividends and asset priority. However, limited voting rights and lower growth potential compared to equity are key drawbacks.
When investing, check the type of preference shares, issuer credibility, and your own financial goals. Used wisely alongside equity and debt, preference shares can help create a strong, income-focused portfolio.
Preference shares provide fixed dividends and priority in payments over equity shares, but they typically lack voting rights.
Key features of preference shares include fixed dividend payouts, priority during liquidation, and the absence of voting rights.
There are six main types of preference shares: cumulative, non-cumulative, convertible, non-convertible, redeemable, and non-redeemable.
Redeemable preference shares can be bought back by the company after a specified time, providing investors with a fixed return within a known timeframe.
Non-redeemable preference shares remain in circulation indefinitely, allowing companies to avoid repurchase obligations and potentially reinvest the funds for growth.
Convertible preference shares allow investors to convert their shares into equity, offering potential capital growth, but they may carry lower dividend rates compared to non-convertible shares.
Non-convertible preference shares provide stable, fixed dividends, ideal for investors seeking consistent income, while convertible shares offer potential for equity participation.
Participating preference shares allow shareholders to participate in surplus profits in addition to fixed dividends, enhancing their returns during profitable years.
They are treated as equity on the balance sheet, but their fixed income and priority payout traits resemble debt, qualifying them as hybrid instruments.
Any retail or institutional investor with a Demat and trading account can invest. Some issues may have minimum lot sizes or be reserved for qualified institutional buyers, depending on the offering terms.
Disclaimer :
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
Enjoy low brokerage on delivery trades
|
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
