What are preference shares?

Preference shares are a class of stock that gives shareholders priority rights when it comes to dividends and, in some cases, company assets. In this guide, we’ll explain how preference shares work, how they differ from ordinary shares, and how you can trade or invest in them with IG.

What are preference shares or preferred stocks?

Preference shares (sometimes called preferred shares) are a class of stock that gives holders priority rights to dividends and, in certain cases, to the distribution of company assets.

If a business pays dividends, preference shareholders are usually entitled to receive theirs before ordinary shareholders. Similarly, if a company goes into liquidation, preference shareholders are prioritised when remaining assets are distributed.

Preference shares combine features of both equities and fixed-income securities. They may appeal to investors who value predictable income, since they typically offer fixed dividend payments (if granted by the company). However, as with any equity, these payments aren’t guaranteed and depend on the firm’s financial health and dividend policy.

Unlike bonds, preference shares can be traded on an exchange and may also qualify for more favourable tax treatment than bond interest, depending on individual circumstances. Learn more about what shares are and how they work.

How do they work?

Preference shares sit between bonds and ordinary shares in a company’s capital structure. They typically offer fixed dividends (if declared by the company) and priority rights to payments ahead of ordinary shareholders.

In practice, this means holders may receive income more predictably than ordinary shareholders, though their dividends aren’t guaranteed, and they usually don’t have voting rights. In the event of liquidation, preference shareholders are paid after bondholders but before ordinary investors.

Types of preference shares

There are several kinds of preference shares, each with different rights and features. The main types include:

1. Cumulative preference shares
2. Non-cumulative preference shares
3. Participating preference shares
4. Convertible preference shares

Cumulative preference shares

Cumulative preference shareholders have the right to receive any missed or deferred dividend payments before ordinary shareholders receive theirs.

For example, if a company skips a dividend one year, those payments accumulate. Once dividends resume, the company must first pay the arrears to cumulative preference shareholders before distributing any remaining dividends to other shareholders.

Non-cumulative preference shares

Non-cumulative preference shareholders do not have the right to claim missed dividends at a later date. If a company decides not to pay dividends in a given period, those payments are simply forfeited.

This structure offers companies greater flexibility during challenging financial periods but provides less certainty for shareholders.

Participating preference shares

Holders of participating preference shares may receive additional dividends beyond the fixed rate if the company performs exceptionally well. This allows them to participate in a portion of the company’s excess profits, a feature not available with standard preference shares.

Convertible preference shares

Convertible preference shares can be exchanged for a predetermined number of ordinary shares. This allows holders to benefit from potential share price appreciation if the company’s ordinary stock rises in value.

Before converting, investors typically review the conversion ratio (the rate at which preference shares are exchanged for ordinary shares) to determine whether conversion is favourable.

Difference between preference shares and ordinary shares

Preference shares generally provide greater income stability, while ordinary shares offer more scope for capital gains and voting influence.

Advantages and disadvantages of preferred stocks

Advantages:
 

• May provide a more consistent dividend stream than ordinary shares

• Often less volatile due to their fixed-income characteristics

• In some cases, can be converted into ordinary shares for capital growth potential

• Priority access to dividends and company assets (if applicable)

Disadvantages:
 

• Typically, there are no voting rights for shareholders

• Lower potential for share price appreciation than ordinary shares

• Dividends are not guaranteed and depend on the company's decisions

• In liquidation, bondholders are still paid before preference shareholders

How to trade and invest in stocks with us

With IG, you can gain exposure to shares in two main ways: trading or investing.

Trading preference shares

When trading, you’re speculating on share price movements using leveraged derivatives such as spread bets or CFDs. This enables you to go long (buy) if you expect prices to rise, or go short (sell) if you expect them to fall, without taking ownership of the underlying shares.

Trading with leverage means both profits and losses are calculated on the full value of your position, not your deposit (margin). This can magnify potential returns but also increases risk.

Investing in preference shares

Investing means buying shares outright through a share dealing account, giving you ownership of the underlying asset. You may receive dividends (if paid by the company) and, in some cases, voting rights.

With IG, you can invest in UK shares from £3 commission, or in US shares from zero commission (terms apply).

To invest in preference shares with IG:

1. Create an account or log in
   
   
2. Search for your chosen company on our share dealing platform
   
   
3. Select ‘buy’ in the deal ticket and choose how many shares you’d like to purchase
   
   
4. Confirm and monitor your position
   
   

Remember that share prices can rise or fall, and you may get back less than you originally invested. Always ensure you understand the risks before opening a position.

Summary

Preference shares combine features of equities and bonds, offering fixed-rate dividends (if granted) and priority claims over ordinary shareholders. They come in several forms, including cumulative, non-cumulative, participating, and convertible, each offering different benefits and considerations.

Understanding how preference shares work can help you make informed choices about how to trade or invest. Explore opportunities in the UK and beyond with an IG trading or investing account.

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