What Is Preferred Stock?

 

Preferred stock (or preferred shares) is a type of ownership in a corporation that has a higher claim on assets and earnings than common stock. Preferred stock typically provides fixed dividends and has features of both equity and debt, making it a hybrid financial instrument.

Key Features of Preferred Stock:

1. Fixed Dividends:
   Preferred shareholders usually receive dividends at a fixed rate, which are paid before any dividends are given to common shareholders.

2. Priority Over Common Stock:
   In the event of liquidation, preferred shareholders are paid before common shareholders, though after debt holders.

3. No Voting Rights (usually):
   Unlike common stockholders, preferred shareholders typically do not have voting rights in corporate decisions.

4. Callable Option:
   Many preferred shares are callable, meaning the issuing company can repurchase them at a predetermined price after a certain date.

5. Convertible Feature (sometimes):
   Some preferred shares can be converted into a specified number of common shares.

6. Cumulative vs. Non-Cumulative:

   • Cumulative preferred stock: Missed dividend payments accumulate and must be paid before dividends to common shareholders.

   • Non-cumulative: Missed dividends are not owed if the company skips them.

Why Companies Issue Preferred Stock:

• To raise capital without diluting voting control.

• To appeal to income-focused investors.

• As a flexible financing option with lower perceived risk than common equity.

Why Investors Buy Preferred Stock:

• Stable, predictable income from dividends.

• Higher claim on assets than common stock.

• Less volatile than common stock, with characteristics similar to bonds.