Preference share
Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A preference share is a share that gets two kinds of priority over ordinary (equity) shares. First, it is paid its dividend (a share of profits) before equity holders get theirs. Second, if the company closes down, it gets its capital back before equity holders. In return, it usually carries no voting rights. So it sits between a bond and an equity share, and is called a hybrid instrument.
Example
Suppose a company has a bad year and has only a small profit to share out. Its preference shareholders are paid their dividend first. Equity shareholders get something only if money is left after that.
Don't confuse with
- Equity share: an equity share is a unit of ownership. It carries voting rights and a residual claim, meaning the holder gets only what is left after everyone else is paid. A preference share is paid first but usually cannot vote.
- Bond: a bond's interest is a fixed legal obligation. A dividend on a share is not.