Types of Preference Shares:
a. Cumulative and Non-cumulative Preference Share: In cumulative preference shares, the unpaid dividends are accumulated and carried forward for payment in future years. On the other hand, in non- cumulative preference share, the dividend is not accumulated if it is not paid out of the current year’s profit.
b. Participating and Non-participating Preference Share: Participating preference shares have a right to share the profit after making payment to the equity shares. The non-participating preference shares do not enjoy such a right.
c. Convertible and Non-convertible Preference Share: The preference shares which can be converted into equity shares after a specified period of time are known as convertible preference share. Nonconvertible shares cannot be converted into equity shares.
d. Redeemable and Irredeemable Preference Share: Redeemable preference shares are those where the company undertakes to repay it after a specified period. Where the amount of the preference shares is refunded only at the time of liquidation, are known an irredeemable preference shares.
Merits:
1. Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment.
2. Preference shares are useful for those investors who want fixed rate of return with comparatively low risk
Limitations:
1. Preference shareholders have no voting right.
2. The dividend paid is not deductible from profit for income tax.
