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What are cumulative preference shares?

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Quick Answer

Cumulative preference shares are stocks that pay dividends to shareholders before common stock is paid out. Cumulative preference shares are also considered preferred stock.

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Full Answer

There are two main kinds of stock: common and preferred. Common is lower-priced, but also does not guarantee dividends every time (if the company has a break-even or their net profit isn't enough). Preferred stock is stock that is pulled ahead of the line and is paid before common stock, but preferred stock is more expensive initially.

There are four main kinds of preferred stock. The first is cumulative preferred, which means all dividends have to be paid, even the ones that were skipped. The second is non-cumulative preferred, the type that does not include the skipped dividends. The third kind, participating preferred, allows the shareholder to earn extra money on the stock based on certain conditions and standards. The fourth kind is convertible, which allows the shareholder to convert all their stock and exchange it for a specified amount of common stock.

Although preferred stock (cumulative preference shares) legally sit ahead of common stock as far as liquidating the company, preferred stockholders have no voting rights as the common shareholders do. But in the event of bankruptcy, the preferred shareholders are the first ones to receive their money back.

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