What Are Preferred Shares? Meaning, Definition & Basics Explained

Preferred shares are a type of ownership issued by companies that come with specific features different from ordinary shares. To fully understand preferred shares, it helps to first learn what shares are and how they represent company ownership.

This guide explains preferred shares in simple, beginner-friendly terms. It covers their meaning, features, how they work, types, dividends, and their placement in financial statements. For more context on share types, see equity shares and common stock.

Table of Contents

• What Are Preferred Shares?
• Preferred Shares Meaning in Simple Words
• What Is Preferred Stock?
• Key Features of Preferred Shares
• How Preferred Shares Work
• Preferred Shares Dividend (Concept)
• Types of Preferred Shares
• Non-Cumulative Preferred Shares Explained
• Preferred Shares Par Value
• Preferred Stock on the Balance Sheet
• Simple Example of Preferred Shares
• FAQs About Preferred Shares

What Are Preferred Shares?

Preferred shares are ownership shares issued by a company that provide certain priority rights compared to ordinary shares. They represent a type of equity ownership and are classified under shareholders’ equity in financial statements.

These shares are often chosen by investors who seek more predictable income streams or specific rights, while still participating in company ownership.

Preferred Shares Meaning in Simple Words

Preferred shares are ownership shares that come with special features or privileges defined by the company. Unlike ordinary shares, preferred shares often receive priority in dividend payments and sometimes in company liquidation.

At a beginner level, understanding preferred shares as “ownership with priority benefits” is sufficient.

What Is Preferred Stock?

Preferred stock is another term for preferred shares. Both describe the same type of ownership in a company. Preferred shares are distinct from equity shares or common stock, which are ordinary ownership shares with no guaranteed priority benefits.

Key Features of Preferred Shares

• Ownership type: Represents partial ownership in the company
• Dividend priority: Dividends are defined in advance and paid before ordinary shareholders
• Limited voting rights: Often, preferred shareholders have no voting rights or limited participation
• Fixed income potential: Preferred shares often provide stable dividend income

How Preferred Shares Work

Preferred shares function in a simple way for beginners to understand:

• Companies issue preferred shares to raise capital for operations or growth
• Investors purchase these shares and gain ownership with specific priority rights
• Dividends may be declared according to the terms set at issuance
• Preferred shareholders generally do not participate in everyday management decisions

Preferred Shares Dividend (Concept)

Dividends on preferred shares are paid before ordinary share dividends. However, dividends are not guaranteed; they are paid only if the company decides to distribute profits. Some preferred shares are cumulative, meaning missed dividends accumulate and must be paid later.

Types of Preferred Shares

• Cumulative Preferred Shares: Accumulate unpaid dividends to be paid in the future
• Non-Cumulative Preferred Shares: Missed dividends are not paid later
• Convertible Preferred Shares: Can be converted into ordinary shares at a predetermined rate

Preferred Shares Non-Cumulative Explained

Non-cumulative preferred shares do not accumulate unpaid dividends. If the company skips a dividend in a particular year, shareholders lose that dividend for that period.

Preferred Shares Par Value

Par value is the face value of a preferred share. It is used to calculate dividend amounts if dividends are expressed as a percentage of par value.

Preferred Stock on the Balance Sheet

Preferred stock appears under shareholders’ equity on the balance sheet. It represents funds raised from investors in exchange for ownership with priority benefits.

Simple Example of Preferred Shares

If a company issues 1,000 preferred shares with a 5% dividend, an investor holding 100 shares receives priority dividends based on the 5% rate before ordinary shareholders receive any payment.

FAQs About Preferred Shares

Is preferred stock equity?

Yes. Preferred stock is part of shareholders’ equity on the balance sheet.

Do preferred shares always pay dividends?

No. Dividends are paid only if declared by the company.

Are preferred shares ownership?

Yes. Preferred shares represent ownership in a company.

Where are preferred shares shown in financial statements?

Preferred shares appear under shareholders’ equity on the balance sheet.