Preference shares are those shares which carry certain priority rights and fulfil both the following conditions:
(i) Dividend at a fixed rate or amount is payable on these shares before any dividend is paid on equity shares.
(ii) At the time of winding up of the company, capital is repaid to preference shareholders prior to the return of equity capital.
Thus, preference shares have a preference both in terms of receipt of dividend and the repayment of the capital vis-a-vis equity shareholders. Preference shares by nature are a blend of both equity shares and debentures.
Like equity shares, dividend on preference shares is payable but only when profits are earned by the company and like debentures the rate of dividend is fixed.