There are different types of preference shares according to the clause contained in the agreement at the time of their issue. The following are some important kinds of preference shares.
Cumulative or non-cumulative preference shares
1. Cumulative preference shares
Shares which have the right of dividend of a company even in those years in which it makes no profit are called cumulative preference share. The company must pay the unpaid dividends on preference shares before the payment of dividends to equity shareholders.
2. Non-Cumulative preference shares
Non-cumulative preference shares are in contrast to preference shares. Non-cumulative dividends do not accumulate if they are not paid when due.
Participating and non-participating preference shares
The holders of Participating preference share receive stipulated rate of dividend and also participate in the additional earnings of the company along with the equity shareholders.
In practice, most preference shares are non-participating in nature. It means that preference shareholders receive only stated dividend and no more. This is based on the fact that the preference shareholders surrender their claim to extra earnings in lieu of their right to receive the stated dividend.
Redeemable and non-redeemable preference shares
1. Redeemable preference shares
Non-redeemable preference share is permanent in nature and its shareholding is continuous till the company goes into liquidation. In this sense, the preference share resembles the equity share. So, in order to attract the investor, a clause is included in the agreement for redeeming the preference share after the expiry of a specified period.
The redemption of preference share is advantageous for the company. It acts as a hedge against inflation. When the money rate declines, the company may redeem the shares and refinance it at a lower dividend rate.
2. Non-redeemable preference shares
Redeemable preference shares are also called, at the option of the company. If this call is exercised by the company, the investor must find alternative form of investment for investing the sum he gets on the retirement of the shares. Investment in equity share is more profitable than that of preference share.
Preference share holders do not participate, in the extra earnings of the company, except in the case of participating preference shares.
Convertible and non — convertible preference shares
1. Convertible preference shares
Convertible preference shares are those which are converted into equity shares at a specified rate on the expiry of a stated period.
For example, a 100 Rupee preference share may become convertible into 10 equity shares of Rs.10 each.
2. Non-Convertible preference shares
Convertible preference share may also have cumulative or participating rights. This kind of preferred stock is ideal from the view point of the investor. Non-convertible preference shares are not converted into equity stock. Non-convertible preference shares may also be redeemable.