A class of shares that come with certain rights distinguishing them from holders of common shares. Preferred shares are a component of share capital that possess specific features not available to common shares, including specific rights and properties of both an equity and a debt instrument.
Preferred shares usually provide higher dividends, and a better claim (priority) to an entity’s assets in the event of liquidation. Similar to debt instruments (e.g., bonds), preferred shares pay interest, often at a higher yield than bonds, while offering better dividend returns and less risk than common shares. These shares have priority, over common shares, in receiving dividends. The dividend rate can be fixed or floating as defined in the terms of the issue. However, holders of preferred shares generally do not enjoy voting rights. This setback is made up by the ability to have their claims discharged before the claims of common shareholders at the time of liquidation.
Preferred shares are also known as preferred stocks or preference shares.
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