01 / 10
What Are Preference Shares?
📊 ⭐
Preference shares are a type of share with special rights or preferences.
You have already learned that a share represents an ownership interest
in a company. But not every share has exactly the same rights.
Preference shares are a type of share that can give investors certain
preferential rights compared with ordinary shares.
These rights can relate to dividends, repayment of capital or other
matters, depending on the terms of the shares.
Simple idea: Preference shares are shares that come
with specific preferential terms.
02 / 10
Why Are They Called “Preference” Shares?
🏢 Company
→
⭐ Preference
→
👤 Investor
The word preference means that these shares can have
certain rights that receive priority over ordinary shares in specified
situations.
For example, a preference share may have a right to receive a stated
dividend before a dividend is paid on ordinary shares, depending on
the terms of the issue.
Preference can also apply to the return of capital if a company is
wound up, subject to the applicable terms and law.
The exact rights of preference shares depend on their terms. Always
read the company's official information before investing.
03 / 10
Preference Shares vs Ordinary Shares
| Preference Shares |
Ordinary Shares |
|
May have preferential rights to dividends.
|
Usually receive dividends after any applicable preference rights.
|
|
May have priority regarding return of capital.
|
Usually rank behind preference shares for return of capital.
|
|
Voting rights may be limited or subject to specific conditions.
|
Ordinary shares commonly carry voting rights, subject to the company's
rules and applicable law.
|
|
Terms can be more specific and may include special conditions.
|
Usually represent the standard form of equity ownership.
|
There is no simple rule that one type is always better. The right choice
depends on the investor's goals and the specific terms of the shares.
04 / 10
How Can Preference Dividends Work?
🏢 → 💰 → ⭐
Company → Dividend → Preference shareholders
Some preference shares have a stated dividend rate or amount.
For example, imagine preference shares with a stated dividend of
K5 per share per year.
Simple Example
You own 1,000 preference shares.
The stated dividend is K5 per share.
If the company declares the applicable dividend, the amount would be:
1,000 × K5 = K5,000
This is only an example. The actual dividend depends on the terms of
the particular preference shares and whether the relevant dividend
is declared and payable.
05 / 10
Are Preference Dividends Guaranteed?
💰 ❓
A stated dividend does not automatically mean guaranteed income.
This is very important for a beginner to understand.
Preference shares may have a stated dividend, but investors should
not automatically assume that every payment is guaranteed.
The actual rights depend on whether the shares are cumulative or
non-cumulative and on the specific terms of the issue.
The financial position of the company and the applicable legal and
contractual requirements also matter.
Never treat a share dividend as the same as guaranteed bank interest.
Before buying preference shares, read the official terms carefully
and understand when and how dividends can be paid.
06 / 10
What Does “Cumulative” Mean?
Year 1
Dividend unpaid
→
Year 2
Possible accumulation
Some preference shares are called cumulative preference shares.
If a dividend that qualifies as cumulative is not paid when due,
the unpaid amount can generally accumulate and may need to be paid
before ordinary shareholders receive dividends, subject to the terms
of the shares and applicable rules.
For example, if a cumulative preference share has a K2 annual dividend
and the relevant dividend is missed for one year, that unpaid amount
may remain due according to the terms.
Cumulative does not mean the company can never have financial problems.
It means the unpaid preference dividend can carry forward according
to the terms.
07 / 10
What Does “Non-Cumulative” Mean?
Dividend not paid
→
Usually does not build up
Some preference shares are non-cumulative.
With non-cumulative preference shares, if the dividend is not declared
or paid for a particular period, the unpaid dividend generally does
not accumulate for future payment, depending on the terms.
This means an investor needs to understand exactly what type of
preference share they are considering.
Cumulative: unpaid qualifying dividends may accumulate.
Non-cumulative: unpaid dividends generally do not accumulate.
Always check the official terms because the exact rights can differ
between issues.
08 / 10
Do Preference Shareholders Always Have Voting Rights?
🗳️ ⭐
Voting rights can be different from ordinary shares.
Preference shareholders may have limited voting rights or voting rights
that apply only in certain circumstances.
This is one important difference between some preference shares and
ordinary shares.
The exact voting rights depend on the type of preference share,
the company's rules and applicable law.
Do not assume that all shareholders have exactly the same voting rights.
Always check the terms attached to the shares.
09 / 10
What Should a Zambian Investor Check?
🔎 📄 📊
Understand the terms before investing.
- What dividend rate or amount applies?
- Is the dividend cumulative or non-cumulative?
- Are there voting rights?
- What happens if the company does not pay the dividend?
- What is the ranking for repayment of capital?
- Can the shares be redeemed or converted?
- What fees or costs apply?
- What are the risks?
Golden rule: Never buy preference shares simply because
the word “preference” sounds safer. Understand the actual terms first.
10 / 10
🎓
Lesson Complete!
Well done! You now understand the basic idea behind preference shares.
You have learned that preference shares can have special rights,
including preferential treatment for dividends or return of capital,
depending on their terms.
Remember:
Preference shares are not simply “better shares”.
They have different rights and conditions.
Before investing, understand the specific terms, dividend rules,
voting rights, risks and repayment arrangements.
Not all shares are exactly the same. In the previous lessons, you learned about ordinary shares and how becoming a shareholder means owning an interest in a company. In this lesson, we introduce another type of share called a preference share.
Preference shares are shares that can have special rights or preferential treatment compared with ordinary shares. These rights can relate to dividends, repayment of capital, voting rights or other conditions set out when the shares are issued.
For example, a preference share may have a stated dividend rate. This can make preference shares look attractive to an investor who is interested in potential income. However, it is important to understand that a stated dividend does not automatically mean guaranteed income. The exact terms of the shares determine how and when dividends are payable.
Preference shares can also be cumulative or non-cumulative. With cumulative preference shares, qualifying unpaid dividends may accumulate according to the terms. With non-cumulative preference shares, unpaid dividends generally do not accumulate.
Another important point is that preference shareholders may have different voting rights from ordinary shareholders. Some preference shares may have limited voting rights or voting rights that apply only in certain situations.
For a beginner in Zambia, the main lesson is simple: never buy an investment just because it sounds attractive. Before buying preference shares, understand the dividend terms, voting rights, repayment priority, risks and other conditions attached to the shares.
By the end of this lesson, you should understand why preference shares are different from ordinary shares and what you should check before considering them as an investment.
