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Holders of preference shares precede the holders of ordinary shares, but follow debenture holders, in the payment of dvidens and in the return of capital if the issuing company is liquidated. Preference chares normally entitle the holder only to a fixed rate of dividend, but participating preference shares also entitle the holder to a share of residual profits. Preference shares carry limited voting rights and they may be redeemable or not.
Cumulative preference shares carry forward the right to preferential dividends, if unpaid from one year to the next. From the investor’s point of view, preference shares lie between debentures and ordinary shares in terms of risk and income, while to the issuing company they permit some flecibility in distribution policy at a lower cost than debentures. Preference shares now account for a very small portion of issues.
Reference: The Penguin Dictionary of Economics, 3rd edt.
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