A form of compound financial instrument that gives it holders the right to share in the distributable profits of an issuing company and in liquidation proceeds, while carrying no voting rights. Furthermore, the holders are not usually entitled to preemptive rights.

The holders can participate in an annual cash dividend based on the net profit of the issuer. The certificate may be convertible and redeemable at the discretion of its holder. Participation certificates (PCs) may be issued as a participating preferred stock, associated with a guaranteed minimum dividend. Other forms include a common stock similar to or at par with the issuer’s common stock in respect of profit entitlement. A participation certificate is a bearer instrument, and hence it is negotiable.

Holders of participation certificates benefit from the same rights to dividends as an issuer’s shareholders. At times, these certificates provide holders with a claim to liquid assets as shareholders in the event of the issuer’s bankruptcy. For the above reasons, participation certificates are typically cheaper than shares, and can be a more affordable instrument for participating in a company’s growth than shares.

In relation to equity investments, a participation certificate constitutes an interest in a pool of funds or in other instruments, such as international securities, that allow its holder to participate in the movement of a security or group of securities over time.

In yet another context, it is a type of lease financing whereby an investor purchases a share of lease revenues of a certain scheme or program rather than the bond being secured by those revenues. It allows investors to participate in a pro-rata share of a lease-financing agreement (i.e., the revenue generated from the lease-purchase of the property or equipment to which the certificate is linked). In this sense, a participation certificate is tax-exempt, given its function as securities resembling bonds.

It is also known as certificate of participation (COP).