What is a preference share?

A preference share is a type of share that offers certain advantages over ordinary shares, particularly in terms of dividends. Owners of preference shares usually receive dividends before owners of ordinary shares and the dividends are often fixed in advance, which can provide a more predictable income. If a company goes bankrupt, holders of preference shares also have priority over ordinary shareholders in getting their investments out of the company's assets. However, preference shares do not usually carry the same voting rights at general meetings as ordinary shares, which can limit the owner's influence over the company's management.

Some types of preference shares can be converted into ordinary shares under specific conditions, which can be attractive to investors seeking flexibility. In addition, some preference shares may have a call option, which means that the company can redeem them at a predetermined price. This feature makes preference shares an interesting choice for companies that want to be able to adjust their capital structure over time. Preference shares are often popular with conservative investors who are looking for regular and stable returns rather than speculation on share price movements.

Investors in preference shares need to be aware that, despite the added security, they do not always offer the same growth potential as ordinary shares. Therefore, they can be a good addition to a diversified portfolio, balancing risk and potential returns.