Explanation
Non-cumulative preference shares are more risky for investors than cumulative preference shares because:
Key Differences:
- Cumulative Preference Shares: If a company misses a dividend payment, the unpaid dividends accumulate and must be paid to cumulative preference shareholders before any dividends can be paid to common shareholders.
- Non-Cumulative Preference Shares: If a company misses a dividend payment, the right to that dividend is lost forever. The company has no obligation to make up missed payments.
Risk Comparison:
- Non-cumulative preference shares carry higher risk because investors have no protection against missed dividend payments.
- Cumulative preference shares provide a safety net where missed dividends accumulate, reducing the risk of permanent income loss.
Comparison with Common Shares:
- Dividend-paying common shares: These are generally more risky than preference shares because common shareholders have the lowest priority in dividend payments and liquidation.
- Non-dividend-paying common shares: These are typically growth stocks where investors expect capital appreciation rather than dividends, and they carry the highest risk among equity securities.
Therefore, among the given options, non-cumulative preference shares are more risky than cumulative preference shares due to the lack of dividend accumulation protection.
