Preference shares
Preference shares are a special class of share which pay a fixed rate of interest. Some former building societies have issued preference shares to their members when converting to banks as the law does not allow them to give cash.
They are generally regarded as slightly lower risk than ordinary shares because if a company goes bust, preference shareholders are ahead of ordinary shareholders in the queue for payoffs. It may be rare for a big company to collapse, but it is possible that a troubled firm may not be able to pay a dividend to all shareholders. Again, preference shareholders benefit because they get paid first.
The fixed rate of interest offered on preference shares can appear attractive. But preference shareholders lose out if a company does well because they will continue to be paid their fixed rate of interest, rather than increased dividends. And you are not allowed to shelter preference shares by putting them in an Isa, so you will pay tax on the interest.
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TIP: Depending on the rate of interest paid by the preference shares, it can make sense to sell them and invest the cash elsewhere if you can find a better rate of interest. However, the fixed interest paid by preference shares can make them ideal for income seekers.
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