Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.
While we learn about preferred stocks, we would also come across related terms like common stocks. Similar to every other type of share, common stocks are securities that reflect the ownership of investors in the company. This means that the investors become part-owners of the company in proportion to the shares held. The primary motive behind buying common stocks is to have the voting power they give to the investors.
The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. The preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders. Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Not all preferred shares are created equal. Different preferred share classes may have different rights, which to limit the scope of this discussion will not be explained here and will be understood in detail later. The different classes of preferred stocks are - Cumulative Preferred Stock, Non-Cumulative Preferred Stock, Convertible Preferred Stock, Participating Preferred Stock, Callable Preferred Stock, and Adjustable-rate Preferred Stock (ARPS).
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