Preference Shares

Preference Shares

Preference shares can be a good investment option for those who want a higher priority claim on a company’s assets and earnings, but they also come with some drawbacks. Preference shareholders typically have limited voting rights, and their dividend payments may be affected if the company experiences financial difficulties. It’s important to consider the terms and conditions of preference shares before investing in them. 

What are preference shares? 

Preference shares, also known as preferred stock, provide shareholders with a higher priority claim on a company’s assets and earnings than common stockholders.  

This indicates that if a company goes bankrupt or is liquidated, preference shareholders will be paid out before common shareholders. Preference shares also often come with a fixed dividend rate, typically higher than the dividend rate paid to common shareholders. 

Understanding preference shares 

Unlike common stock, preference shares typically pay fixed dividends and have priority over common stock in the event of a company’s liquidation. However, if a company goes bankrupt, preference shareholders may still face significant losses. 

Depending on your investing goal, you should decide whether or not to purchase preference shares. These shares can be a good fit if you desire reliable returns and capital growth at lower risk over equity shares. 

Features of preference shares 

Preference shares offer several features that have allowed regular investors to outperform them even during slow economic development periods. The following list of preference share benefits is most appealing: 

  • One of the key features of preference shares is their priority in receiving dividend payments. If a company cannot pay dividends on preference and common shares, preference shareholders have priority over common shareholders in receiving dividend payments. This feature gives investors a higher level of security, ensuring they receive a consistent return on their investment. 
  • Another important feature of preference shares is their flexibility. Preference shares can be issued in different classes, each with different features such as varying dividend rates, redemption options, and conversion rights. This allows companies to tailor their preference share offerings to meet the specific needs of investors, providing them with greater flexibility and choice. 
  • Preference shares also offer investors the potential for capital appreciation. While the fixed dividend payment provides investors with a steady income stream, preference shares can also increase in value over time. This is because the market value of preference shares can rise and fall based on several factors, including changes in interest rates, market conditions, and the company’s financial performance. 
  • In conclusion, preference shares offer investors several attractive features, including priority in dividend payments, flexibility, and potential for capital appreciation. These features make them an attractive investment opportunity for investors looking for a stable income stream and a higher security level. 

Different types of preference shares 

There are several types of preference shares, each with its distinct features and benefits. Understanding the differences between the various types of preference shares can help investors make more informed decisions when investing in companies that offer these securities. 

  • Cumulative preference shares  

These types of preference shares offer shareholders the right to accumulate unpaid dividends. If a company fails to pay dividends in one year, the amount owed is carried forward to the next year, ensuring that shareholders receive their dividends eventually. 

  • Convertible preference shares  

They are another type of preference shares that offer shareholders the option to convert their shares into common shares at a predetermined conversion ratio. This can be an attractive option for investors who believe that the company’s prospects are strong and that the value of common shares will increase. 

  • Participating preference shares  

They are a type of preference shares that offer shareholders the right to participate in the distribution of profits beyond their fixed dividend rate. If the company performs exceptionally well, shareholders may receive a higher dividend than originally agreed upon. 

  • Redeemable preference shares  

They are a type of preference shares that permit the company to buy back the shares at a specified price after a certain period. This can be a beneficial option for companies looking to raise capital in the short term, as they can offer investors the opportunity to invest in the company for a limited time. 

Example of preference shares 

Consider the situation where a fictional company ABC is issuing 8% preferred stock with a US$1,000 par value. 

A dividend of US$80 annually, or US$18.50 quarterly, would be paid to the investor in return. This preferred stock typically behaves more like a bond than a stock, trading around its par value. This security may be chosen by investors who are seeking to make money. Preferred stock can be issued to raise cash, with the financial industry being the most common issuer of this type of stock. 

Frequently Asked Questions

If a company goes bankrupt, its assets are sold, and the proceeds are used to pay off creditors. Preference shareholders have priority over common stockholders but are still subordinate to bondholders and other secured creditors. If the company’s assets are insufficient to cover all its debts, preference shareholders may not receive the full amount of their investment back. 

That said, preference shareholders may still have a better chance of recouping their investment than common stockholders. This is because preference shareholders have a higher priority in the liquidation process and are entitled to receive their dividends before common stockholders. However, it is important to note that owning preference shares does not guarantee a return on investment or protection against all risks, including the risk of bankruptcy. 

Preference shareholders get dividend payments before equity stockholders. In the event of a company’s dissolution, preference shareholders have the right to claim its assets first, making it a less risky investment than stock. 

The following risks are associated with preference shares: 

  • Interest rate risk: If the market interest rate rises, demand for these shares is expected to fall, resulting in a drop in market values. 
  • Market risk: If market conditions are unfavourable, the values of these shares may fall. 
  • Liquidation risk: Although preference shares are less liquidated than equity shares, the risk still exists. In the event of a liquidation, preference shareholders can only claim assets that remain after bondholders/debenture holders and creditors have been paid. 

Such preference shares that may be claimed after a set time or giving proper notice are known as redeemable shares. Non-redeemable preference shares are not redeemable throughout the company’s existence. They can only be retrieved after asset winding up (liquidation). 

At a fixed conversion ratio, convertible preferred shares are convertible into common stock. The preferred shareholders may wish to convert whenever the market value of the company’s ordinary stock exceeds the conversion price to make a quick profit. 

Related Terms

    Read the Latest Market Journal

    Unlocking Stock Market Potential with AI

    Published on May 24, 2024 48 

    Introduction of AI In the world we live in today, artificial intelligence (AI) is almost...

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 80 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 75 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 78 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 21 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 105 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 110 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 62 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066