What you should know about rights and restrictions
Preference shares differ from ordinary shares through their specific rights and restrictions. They often give priority to dividends but may have no voting rights or reduced voting rights, which affects your ability to influence company decisions.
The terms of preference shares are set out in the articles of association and can vary between companies, which makes it particularly important to read exactly how the terms are drafted before you invest.
Common features of preference shares
Preference shares have certain recurring features that distinguish them from other share classes.
- A priority right to dividends compared with ordinary shares
- A fixed or predetermined dividend may apply
- Often limited or no voting rights
- May have special terms in a liquidation
- Dividends can be cumulative if they are not paid out
Once you know these features, it becomes easier to understand how preference shares fit into a portfolio and what consequences the terms can have over time.
In which situations preference shares are used
Worth bearing in mind
Companies can issue preference shares to attract investors who are looking for steadier dividends or who want a particular position in the company's capital structure. Since preference shares often have a preferential right to dividends, they can suit investors focused on regular returns.
It is important to know both the rights and the restrictions before you invest, since preference shares often have different terms from ordinary shares.
Frequently asked questions
Why do companies choose to issue preference shares?
To raise capital without granting the same voting rights or share in the value that ordinary shareholders receive.
Is the dividend guaranteed?
No. The dividend is predetermined but can be cancelled if the company lacks capital. It is often cumulative and must be paid later.
Do preference shares have voting rights?
It varies. Some have limited or no voting rights, others have full voting rights, depending on the company's structure.
Are preference shares more stable than ordinary shares?
Often, yes. Their price movements are smaller, but they also have less potential when growth is strong.
What does redemption price mean?
It is the price at which the company can redeem the preference shares. It affects the maximum return you can get.