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What is Preferred Stock?


The term 'Preferred Stock' is included in the Investments edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Preferred stock is referred to as preference shares or preferred shares as well. Preferred stock is the name used for a particular equity security which exhibits both characteristics of a stock equity as well as an instrument of debt. Because of this, preferred stocks are commonly deemed to be hybrid types of instruments. In the claims on a company’s assets in the event of default or bankruptcy, preferred stocks prove to be higher ranking than mere common stocks, yet subordinated to bonds.

Preferred stocks have a number of interesting properties. They typically come with a dividend that is often fixed. They also enjoy preference versus common stocks where dividend payments are concerned and at any liquidation of the company’s assets. A downside to preferred stocks is that they do not include voting rights as do common stock shares. Some preferred stocks offer convertible features that turn them into common shares of stock at a certain time. There are preferred stocks that may be called in early at the wishes of the issuing company. All terms for a preferred stock are listed out specifically in the Certificate of Designation.

Since preferred stocks are somewhat like bonds, the big credit rating companies all rate them for quality of credit. Preferred stocks generally garner lower ratings than do bonds, as the dividends of preferred stocks are not guaranteed as are bonds’ interest payments. Preferred stocks are also subordinated to all of the creditors, making them less secure.

Dividends are a key feature of preferred stocks and the main motivating factor in acquiring them. Preferred stocks come with dividend payment preference over other shares. While this does not guarantee that the stated dividends will be paid, the company has to pay such dividends to the preferred share holders before they are allowed to issue any common stock shares’ dividends.

These dividends for preferred stocks might be either noncumulative or cumulative. Cumulative preferred stocks mandate that companies who neglect to cover stated dividends up to the full rate must cover them fully at a later date. In each passing dividend time frame, the dividends continue to accumulate. This might be on an annual, semi annual, or quarterly basis.

Dividends that are not paid on time are labeled dividends that have passed. These passed dividends for cumulative stocks are called dividends that are in arrears. If a stock does not possess these cumulative features, then it is called a straight preferred stock, or a noncumulative dividend stock. With these types of non cumulative preferred stocks, the dividends that become passed simply vanish for good if they are not paid on time.

Besides these preferred stock features, they have various other rights. Some types of preferred shares do include a particular group of voting rights for the approval of unusual events like the ability to issue and sell extra shares, to approve the company to be sold, or even to choose the board of directors’ members. In general, preferred stocks do not have voting rights. Many preferred shares also come with a liquidation value that states what sum of money was put into the issuing corporation as the shares became issued.

The term 'Preferred Stock' is included in the Investments edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.