Preference shares, also called preferred stock, are so-named because preferred shareholders have a higher claim on the issuing company's assets than common shareholders. ... In exchange, preferred shareholders give up the voting rights that benefit common shareholders.

Preference Shares: The Shares of Preference

Introduction:
Preference shares, also known as preferred shares or preferred stock, are a type of equity security that combines features of both common shares and bonds. They are called the shares of preference because they offer certain preferences and advantages over common shares.

Key Points:
- Preference shares are a class of shares issued by a company that entitles the holders to preferential treatment in terms of dividend payments and claims on the company's assets.
- These shares are typically issued with a fixed dividend rate, which means that the shareholders receive a fixed amount of dividend before any dividend is paid to common shareholders.
- Preference shareholders have a higher claim on the company's assets and earnings compared to common shareholders. In the event of liquidation or bankruptcy, preference shareholders are entitled to receive their initial investment back before any distributions are made to common shareholders.
- Preference shares often do not carry voting rights, or the voting rights may be limited. This means that preference shareholders do not have the same level of control over the company's decisions as common shareholders.
- Preference shares are usually less volatile than common shares, making them a more stable investment option for risk-averse investors. They offer a fixed income stream through regular dividend payments.
- However, preference shares also have some disadvantages. The fixed dividend rate means that investors may miss out on higher dividend payments if the company's profits increase. Additionally, preference shareholders may not benefit from the capital appreciation of the company's shares as much as common shareholders.

Types of Preference Shares:
- Cumulative Preference Shares: These shares accumulate any unpaid dividends and must be paid before any dividends can be paid to common shareholders.
- Non-cumulative Preference Shares: These shares do not accumulate unpaid dividends. If the company does not declare a dividend in a particular year, the shareholders do not have a claim on those dividends in the future.
- Convertible Preference Shares: These shares can be converted into common shares at a predetermined conversion ratio. This allows preference shareholders to benefit from any future increase in the company's share price.

Conclusion:
Preference shares are called the shares of preference because they offer certain advantages and preferences over common shares, such as fixed dividend payments, higher claims on assets, and stability. However, they also have limitations, such as limited or no voting rights and potential missed opportunities for higher dividends and capital appreciation. The different types of preference shares cater to the specific preferences and needs of investors.