Most investors invest in companies by buying common or ordinary shares. This does not pull away preference shares. As this type of shares is more common to companies with venture capital investment. This article discusses nonparticipating preference shares.
Meaning of non-participating preference shares
This is a type of preference shares whose holders do not have the right to the second share of a dividend of the company.
It can also be defined as the type of preferred stock in which holders cannot receive another share of the company’s properties in the event of winding up of that entity.
It is a type of preference share. Therefore, it received a fixed dividend as every other preferred stock.
Holders receive dividends once. Unlike participating shareholders who have the right to receive further dividends along with ordinary shareholders, non-participating preference shares received the same fixed dividend with other preferred stocks.
If the company liquidates. This type of preference shares is among those preferred stockholders that will be paid all their investment in full before common stockholders.
However, they are not entitled to receive an additional amount from the sales of the company’s properties along with ordinary shareholders.
Just like every other preferred share, nonparticipating preference shares cannot vote at the annual general meeting of the company.
In a null shell, this type of shares is the opposite of Participating preference shares.
Example to explain non-participating preference shares
To explain this further, assuming a company XYZ board of directors decided to declare a total dividend of 6 million Naira. Split into 2.5 million Naira for preference shares and the remainder to ordinary shares.
Assuming the company has participating and nonparticipating preference stocks. Both stocks will take part in the 2.5 million dividends that were declared by management for this category. However, participating preference shareholders will also partake in the remaining dividend for ordinary shareholders (that is, the 3.5 million Naira dividends).
Similarly, if a liquidated company sold all its assets for 35 billion Naira. And its total preference shares is 10 billion Naira (makeup of 7 billion nonparticipating and 3 billion participating preference shares) while its ordinary shares are 15 billion Naira.
The directors will pay the preference shares of 10 billion Naira in full. Leaving 25 billion Naira for ordinary shareholders. Because the company has participating preference shareholders, this shareholders will also participate in the sharing of the 25 billion Naira along with ordinary shareholders. But, nonparticipating shares will not have this opportunity.
In the final note, this type of shares only enjoy what is due to them and does not have any further benefits. Also, if you understand Participating preference shares then, the opposite of it is what we have just discussed.