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Preference Shares Features

Introduction

Understanding the features of preference shares is crucial for banking and finance exams like IBPS PO, SBI Clerk, SSC CGL, and RRB NTPC. Questions on preference shares test candidates' knowledge of different types of shares and their characteristics, which is fundamental for topics related to capital markets and company finance.

Pattern: Preference Shares Features

Pattern

This pattern tests the understanding of the key characteristics and rights associated with preference shares issued by companies.

Key Concept:

Preference shares are a class of shares which have preferential rights over equity shares in payment of dividends and repayment of capital.

Important Points:

  • Dividend Preference = Preference shareholders receive dividends before equity shareholders.
  • Capital Repayment Preference = In case of liquidation, preference shareholders are paid before equity shareholders.
  • No Voting Rights = Generally, preference shareholders do not have voting rights except in specific circumstances.

Related Topics:

  • Equity Shares Features
  • Types of Shares (Equity, Preference, Bonus, Rights)
  • Capital Market Instruments

Step-by-Step Example

Question

Which of the following is a characteristic feature of preference shares?

Options:

  • A. Preference shareholders have voting rights in all company matters
  • B. Preference shareholders receive dividends only after equity shareholders
  • C. Preference shareholders get priority in dividend payment over equity shareholders
  • D. Preference shares carry no fixed dividend rate

Solution

  1. Step 1: Understand dividend rights

    Preference shareholders receive dividends before equity shareholders, so dividend priority is a key feature.

  2. Step 2: Analyze voting rights

    Preference shareholders generally do not have voting rights except in special cases, so voting rights in all matters is incorrect.

  3. Step 3: Check dividend rate

    Preference shares usually carry a fixed dividend rate, so "no fixed dividend rate" is incorrect.

  4. Final Answer:

    Preference shareholders get priority in dividend payment over equity shareholders → Option C

  5. Quick Check:

    Preference shares dividend priority = before equity shares ✅

Quick Variations

This pattern may appear as questions on types of preference shares (cumulative, non-cumulative, redeemable, irredeemable) or differences between preference and equity shares.

Trick to Always Use

  • Remember: "Preference = Priority" for dividends and capital repayment
  • Mnemonic: "No Vote, But First Note" (No voting rights, but first in dividend)

Summary

Summary

  • Preference shares have priority in dividend payment over equity shares.
  • They usually carry fixed dividend rates and priority in capital repayment.
  • Generally, preference shareholders do not have voting rights.

Remember:
Preference shares = Priority in dividends and capital, no general voting rights

Practice

(1/5)
1. Which advantage do preference shareholders have over equity shareholders at the time of company liquidation?
easy
A. Right to participate in management decisions
B. Priority in repayment of capital
C. Right to receive bonus shares
D. Unlimited voting rights in all company matters

Solution

  1. Step 1: Identify liquidation-related rights

    The question focuses on the rights of preference shareholders when a company is wound up.

  2. Step 2: Apply the concept

    Preference shareholders are entitled to repayment of capital before equity shareholders during liquidation, though after creditors.

  3. Final Answer:

    Priority in repayment of capital → Option B

  4. Quick Check:

    Liquidation order: Creditors → Preference → Equity ✅
Hint: Liquidation benefit = Capital repayment priority.
Common Mistakes: Confusing dividend priority with liquidation priority.
2. Which of the following statements about voting rights of preference shareholders is correct?
easy
A. Preference shareholders have no voting rights except in certain special circumstances
B. Preference shareholders always have voting rights equal to equity shareholders
C. Preference shareholders have voting rights only in Annual General Meetings
D. Preference shareholders have voting rights only when dividends are paid

Solution

  1. Step 1: Understand voting rights

    The question tests the knowledge of voting rights associated with preference shares.

  2. Step 2: Analyze the options

    Generally, preference shareholders do not have voting rights. However, they may get voting rights in special cases such as when dividends are in arrears or during certain company resolutions.

  3. Final Answer:

    Preference shareholders have no voting rights except in certain special circumstances → Option A

  4. Quick Check:

    Preference shares voting rights = none except special cases ✅
Hint: Mnemonic: 'No Vote, But First Note' to remember no voting rights generally.
Common Mistakes: Assuming preference shareholders always have voting rights like equity shareholders.
3. In case of company liquidation, preference shareholders are entitled to:
easy
A. Receive payment after equity shareholders
B. Not receive any payment
C. Receive payment before equity shareholders
D. Receive payment only if equity shareholders agree

Solution

  1. Step 1: Identify liquidation rights

    The question tests the priority of capital repayment during liquidation between preference and equity shareholders.

  2. Step 2: Apply the concept

    Preference shareholders have preferential rights over equity shareholders in repayment of capital during liquidation, meaning they are paid before equity shareholders.

  3. Final Answer:

    Receive payment before equity shareholders → Option C

  4. Quick Check:

    Preference shares capital repayment priority = before equity shares ✅
Hint: Preference shares = Priority in dividend and capital repayment.
Common Mistakes: Confusing liquidation payment order between equity and preference shareholders.
4. Which type of preference shares ensures that unpaid dividends are carried forward to future years?
medium
A. Non-Cumulative Preference Shares
B. Redeemable Preference Shares
C. Cumulative Preference Shares
D. Convertible Preference Shares

Solution

  1. Step 1: Identify dividend treatment

    The question focuses on how unpaid dividends are handled under different types of preference shares.

  2. Step 2: Apply the concept

    Cumulative preference shares allow unpaid dividends to accumulate and be paid in future years before any equity dividend is declared.

  3. Final Answer:

    Cumulative Preference Shares → Option C

  4. Quick Check:

    Cumulative = unpaid dividends carried forward ✅
Hint: Cumulative = carry forward unpaid dividends.
Common Mistakes: Confusing redemption feature with dividend accumulation feature.
5. Cumulative preference shares differ from non-cumulative preference shares in that:
medium
A. Cumulative preference shares do not carry fixed dividend rates
B. Cumulative preference shares accumulate unpaid dividends for future payment
C. Non-cumulative preference shares accumulate unpaid dividends
D. Non-cumulative preference shares have voting rights

Solution

  1. Step 1: Understand dividend types

    The question tests the difference between cumulative and non-cumulative preference shares regarding dividend payments.

  2. Step 2: Apply definitions

    Cumulative preference shares accumulate unpaid dividends and pay them later. Non-cumulative preference shares do not accumulate unpaid dividends. Both types usually carry fixed dividend rates and generally do not have voting rights.

  3. Final Answer:

    Cumulative preference shares accumulate unpaid dividends for future payment → Option B

  4. Quick Check:

    Cumulative preference shares = accumulate unpaid dividends ✅
Hint: Cumulative = Carry forward unpaid dividends; Non-cumulative = No carry forward.
Common Mistakes: Mixing up cumulative and non-cumulative dividend features.

Mock Test

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