Glossary · UK
What is Preference Shares?
Shares that pay a fixed dividend before ordinary shareholders are paid anything, but that usually carry no voting rights and limited upside.
Full Definition
Preference shares (or "prefs") are a class of company shares that sit between ordinary shares and debt in a company's capital structure, giving the holder a fixed dividend rate that must generally be paid in full before any dividend can be paid to ordinary shareholders, and priority over ordinary shareholders (though normally still behind creditors and bondholders) if the company is wound up. In exchange for this priority and a predictable, bond-like income stream, preference shares typically carry no voting rights at general meetings (except in limited circumstances, such as when the preference dividend has been missed) and do not usually share in the company's growth beyond the fixed dividend rate, unlike ordinary shares, which carry full voting rights and unlimited upside but rank last for both dividends and capital. Common variants include cumulative preference shares, where any missed dividend accrues and must be paid before ordinary shareholders receive anything once the company can afford it; participating preference shares, which can receive an additional dividend on top of the fixed rate in a strong year; convertible preference shares, which can be exchanged for ordinary shares on pre-agreed terms; and redeemable preference shares, which the company can buy back at a set date or price, giving them a debt-like maturity. Preference shares are relatively uncommon among UK-listed companies compared with the United States, but they do appear in venture capital and private equity deals (where investors often receive preference shares to protect their capital ahead of the founders' ordinary shares) and in some building societies, insurers and older utility companies; dividends received are taxed under the normal UK dividend tax rules, subject to the annual dividend allowance.