Preference shares are a hybrid security that is not heavily utilized by corporations as a means of raising capital. It is hybrid because it combines some of the characteristics of debt and of some equity. Legally a preference share represents a position of the ownership of the company, and thus shown in the balance sheet with the equity shares as making up the capital stock or equity interest. In the investment practice, however, preference share is basically a weak corporate security as it has the limitation of bonds with few of the advantages. It does not enjoy strong legal position of the bond when the deportation is under much less compulsion to pay preference dividends than to pay bond interest because preference dividends than to pay bond interest because preference share is merely given the right to receive its specific dividend before any dividend are paid on the equity. When a corporation fails to meet interest charges on bonds, the result is receivership, which may result in liquidation or (more probably) a re-organisation with a complete turnover management. Therefore, it may be presumed that company will pay bond interest as long as it is possible to do so. But the penalty resulting from a failure to declare dividends to preference share holders is not particularly onerous. Such a default merely means that the company cannot pay dividends on the common until the preference dividends have been paid in full. Preference shares do have. however certain preferences which makes it similar to bonds since both bonds and preference shares usually have (i) a limited return (ii) a prior claim on assets and income of the corporation.

FEATURES OF PREFERENCE SHARES : The main features of preference share are listed below

1. Dividends: Preference shares have dividend provisions which are either cumulative or non cumulative. Most shares have the cumulative provisions which means that any dividend not paid by the company accumulates. Normally, the firm must pay these unpaid dividends are known as dividends in arrears.

2. Participating Preference Shares: Most preference shares are non-participating, meaning that the preference shareholder receives only his stated dividend and no more. The theory is that the preference shareholder has surrendered claim to the residual earnings of his company in return for the right to receive his dividend before dividends are paid to common shareholders. The participating preference shareholder receives stipulated dividends and shares additional earnings with the common shareholders. But this share is usually non-cumulative which confirms the view that preference share does have both protective and profit participating provisions.

3. Voting Rights: Preference shares do not normally confer voting rights. The basics for not following the preference shareholder to vote is that the preference shareholder is in a relatively secure position and, therefore, should have no right  to vote except in the special circumstances.

4.  Convertible: Convertible preference share means that the owner has the right to exchange a preference share for a share of equity share of the same company. As in the same case of bonds, sometimes the number of shares of equity are given. There are times when conversion is determined on the basis of par value. The holder if convertible preference shareholder usually has a stronger claim that the holder of an equity share to earnings and assets. In addition, if a company’s earnings increase, the convertible preference shares will rise in value.

5.  Par Value: Most preference shares have a par value. When it does the dividend rights and call price are usually stated in terms of the par value. However, those rights would be specified even if there were no par value. It seems therefore, as with equity shares. the preference share that has a par par value has no advantage over preference share that has no par value.