Preference Shares

Traditionally, Preference Shares have been seen as one of the principal methods of financing companies. However, their use in recent years has become soemwhat limited.

Preference Shares are shares that have several features, namely:

1. they carry a fixed percentage dividend
2. they are normally "cumulative", i.e. if the dividend can not be paid in one year, it carries forward to the following year, where it becomes a priority item
3. they do not carry voting rights or any other rights to participation in the running or policy of the company
4. they do not participate, in any way, in any growth in the company or improvement in the company's profitability or value
5. in terms of priority of payment of dividend and, in the event of corporate failure, repayment of capital, they rank ahead of ordinary shares, but behind loan notes and debentures.
Preference Shares now have very little use in the financing of companies, although there remain a few, very specialist, uses for them. They are, at best, seen as being a "halfway house" between ordinary shares (at one end of the financing spectrum) and long-term loans (at the other end of the spectrum) and they are seen to enjoy the advantages and privileges of neither ordinary shares or long-term loans.

The general view is that, if you want a fixed interest rate, priority on payment of interest and repayment of capital (in the event of corporate failure), no participation in the growing profits and value of the company and no participation in the company's organisation and policy and would like the security to be repaid by the company (i.e. a safe investment with very limited growth potential), buy a loan note / debenture.

If, on the other hand, you want a variable dividend, which (hopefully) rises with the growing profits and value of the company, with participation in the organisation and policy making, accept that the security will never be repaid by the company and you are prepared to take some degree of risk (i.e. you are prepared to be a limited risk taker, but one who seeks some return for the acceptance of that risk) then buy the company's ordinary shares.

In neither case should you consider Preference Shares, as they offer the advantages of neither ordinary shares nor long-term loans.

Preference Shares are valued on the Stock Market as less secure fixed-interest long-term loans.