Lesson 3 of 8 · All lessons in this module
- Equity versus debt, why companies issue shares, and equity in global markets
- Common shares: voting rights, share classes, callable and putable shares
- Preference shares: cumulative, participating and convertibleVideo lesson
- Integrated cases: share classes, control and the liquidation ladder
- Private versus public equity: venture capital, buyouts and PIPEs
- Investing in foreign equity: direct, depository receipts, GRS and BLDRs
- Risk and return of different equity securities
- Book value, market value, ROE and the cost of equityVideo lesson
Lesson 3 of 8 · 13 min
Preference shares: cumulative, participating and convertible
Preference shares sit between debt and common equity: a fixed, higher dividend and priority over common shareholders, but no promise and usually no vote.
In short
- Preference shares rank above common shares for dividends and liquidation, but below all debt.
- They usually have no voting rights and no share in operating performance; the dividend is fixed and usually higher than the common dividend, so it is non-discretionary in curriculum wording, yet not a contractual obligation.
- Like common shares they can be perpetual and callable or putable.
- Cumulative: missed dividends accrue and must be paid before any common dividend. Non-cumulative: missed dividends are lost, though the current preferred dividend still comes before any common dividend.
- Participating: fixed dividend plus extra if profits exceed a set level (and possibly extra in liquidation). Used more by smaller, riskier firms.
- Convertible: can be exchanged for a set number of common shares; popular in venture capital and private equity.
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