Preference stocks or preference shares as they are also know are so called because they enjoy certain preferences in comparison with equity shares.
Preferences
- Preference share holders have a privilege or priority for payment of dividend. Equity dividend can be paid only after dividend has been paid to the preference share holders of adequate provision has been made for its payment;
- At the time of closure of the company, the preference share holders have a preference for payment of their dues before those of the equity share holders;
The Other Side
On the flip side, the dividend on preference shares is fixed whereas equity divided could be much higher. However, in the case of both preference and equity shares, the company need not pay dividend if there are no profits available for distribution.
Preference shares could be considered as hybrid instruments. Like equity, dividend is paid subject to adequacy of profits but like debentures, the rate of return is fixed.
Preference stocks are suitable for investors who are interested in safety and are content with a fixed return on their investment. For the issuing company, preference stocks are a worthwhile option because the company is not obliged to pay dividend and no charge is to be created on assets.
With preference shares, the dividend (profit for laymen like me) is fixed, so it seems like a good way to plan ahead properly - especially if you rely on exact financial planning to reach your money goals.
However, if there are no profits, then you don’t get anything at all - not so good for planning. Seems there are pros and cons for every single type of share you buy. Not for the non-risk-takers in life