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Preferred Stock

Preferred Stock is a type of corporate ownership that offers higher claims on assets and earnings than common stock, with fixed dividends paid before common stockholders. Key features include dividend priority, lack of voting rights, and options for convertibility and participation in profits. While it provides predictable income and lower risk, it also has limitations such as limited voting rights and less potential for capital appreciation.

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20 views2 pages

Preferred Stock

Preferred Stock is a type of corporate ownership that offers higher claims on assets and earnings than common stock, with fixed dividends paid before common stockholders. Key features include dividend priority, lack of voting rights, and options for convertibility and participation in profits. While it provides predictable income and lower risk, it also has limitations such as limited voting rights and less potential for capital appreciation.

Uploaded by

Simon Chen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Preferred Stock

Preferred Stock is a class of ownership in a corporation that has a higher claim on the company's
assets and earnings than common stock. It is called "preferred" because holders receive dividends
and asset distributions before common stockholders, typically with fixed dividends that must be paid
before dividends can be distributed to common shareholders.

Key Features of Preferred Stock:

1. Dividend Priority:

o Preferred stockholders receive dividends before common stockholders.

o Dividends are often fixed and expressed as a percentage of the stock's par value
(e.g., 5% preferred stock).

2. No Voting Rights:

o Preferred shareholders usually do not have voting rights in corporate decisions,


unlike common shareholders.

3. Convertible or Non-Convertible:

o Some preferred shares are convertible, meaning they can be exchanged for a
specified number of common shares under certain conditions.

4. Cumulative or Non-Cumulative:

o Cumulative Preferred Stock: If the company misses dividend payments, these


accumulate and must be paid before common shareholders receive dividends.

o Non-Cumulative Preferred Stock: Missed dividends are not carried forward.

5. Participating or Non-Participating:

o Participating Preferred Stock: Allows holders to share in the company's profits above
a certain level, in addition to fixed dividends.

o Non-Participating Preferred Stock: Limits holders to fixed dividends only.

6. Callable Feature:

o Some preferred stocks are callable, meaning the issuing company can repurchase
them at a predetermined price after a specified date.

7. Preference in Liquidation:

o In the event of a company liquidation, preferred shareholders have priority over


common shareholders in claiming the company's remaining assets.

8. Risk and Return:

o Preferred stock is less risky than common stock due to fixed dividends and priority in
asset claims but offers less potential for capital appreciation.
Advantages of Preferred Stock:

 Provides regular, predictable income (fixed dividends).

 Lower risk compared to common stock.

 Convertible options may allow capital appreciation.

Disadvantages of Preferred Stock:

 Limited or no voting rights.

 Dividends may be skipped if the company faces financial difficulties (in the case of non-
cumulative shares).

 Less potential for price appreciation compared to common stock.

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