Home/Blogs/What Are Cumulative Shares

What Are Cumulative Shares

stock market
26 Sep 20236 mins readBy MOFSL

When investing in the stock market, investors have their pick of various shares and securities with unique features and benefits. One particular form of share issued to the public to raise capital may include preference shares that do not give shareholders voting rights; instead, they offer dividends.

Preference shares can be subdivided into different types; one being cumulative preference shares. Let us delve deeper into this type of security.

Understanding Preference Shares

Preference shares, more commonly referred to as preferred stock, are a special form of share where dividends are paid out ahead of common stock dividends. Thus, it gives preference shareholders preference when sharing profits. Furthermore, preference shareholders typically have preferential rights over common shareholders regarding sharing profits. 

Open Your free Demat Account in just 5 minutes!

In the case of bankruptcy, they will usually receive their dividends before other investors claim them or own assets within a company's assets. These dividends remain fixed while not holding voting rights, as common shareholders do.

But how are preference shares different from cumulative preference shares? Let's understand. 

What Are Cumulative Preference Shares?

Cumulative preference shares are a type of preference share that provides investors with additional perks compared to ordinary shares (common). They especially appeal to investors seeking reliable income streams and downside protection.

Cumulative Preference Shares offer shareholders an extra perk. Cumulative preference shares give shareholders the right to receive cumulative dividend payouts even when the company is not profitable. However, these dividends will be counted as arrears until profitability returns to its business operations. When that time arrives, dividends will be distributed in full.

How Do Cumulative Preference Shares Work?

  1. Dividend Priority: When a company pays dividends to its shareholders, cumulative preference shareholders have a priority claim. This means they receive their dividends before common shareholders. If the company faces financial difficulties and cannot pay dividends, the missed dividends accumulate, which is where the term "cumulative" comes from.
  2. Accumulated Dividends: If a company misses dividend payments to cumulative preference shareholders, these unpaid dividends accrue and must be paid in the future before any dividends are distributed to common shareholders. This is an important feature that ensures preference shareholders receive their due, even in challenging financial times.
  3. Fixed Dividend: Unlike common shareholders, who receive dividends based on company performance and decisions by the board of directors, cumulative preference shareholders typically receive a fixed dividend. This fixed rate is predetermined at the time of issuance and expressed as a percentage of the par value of the shares.

Conclusion

Dividend priority, accumulated dividend feature, and stability make cumulative preference shares attractive for those seeking a reliable income stream and a degree of protection in uncertain times. However, it's essential to carefully evaluate any investment considering your financial goals, risk tolerance, and the specific terms and conditions of the cumulative preference shares in question.

 

Trending Blogs: NSE Holidays 2024 | BSE Holidays 2024 | Invest in Small Cap & Mid Cap Mutual Fund & Stocks | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | Impact of RBI Circular on Currency Trading | RBI’s New Lending Guidelines | Electric Air Taxis in India

 

Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C