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What is a Preferred Stock?

What is a Preferred Stock?

Preferred stock are dividend-paying equity shares issued by corporations, which pays a dividend with a higher priority than common stock, but lacks the voting rights that come with common stock.

Preferred stock is very similar to a bond, because it will often be issued to raise capital for projects, and dividends (or interest) are expected to be paid regularly by the issuing company, but it still experiences the appreciation (and depreciation) of equity shares.

Unlike common stock, preferred stock has no voting rights. Preferred stock may or may not have a maturity date. Regular preferred stock might experience periods without dividend payments, but Cumulative Preferred stock would be paid-up for the dividends the company missed payments on, if dividend payments started again.

Dividend rates on preferred stocks are usually stated in the contract, so dividend payments over and above that amount can go to holders of common stock or elsewhere; in other words, preferred stock does not have as much upside potential as common stock, but it may capture more of it if it is "participating preferred" stock.

There are also callable preferred and convertible preferred shares. Preferred stocks are traded on exchanges and are generally issued at $25 per share. Bonds are senior to preferred stock in the event of bankruptcy.

There are hybrid securities which blend debt and equity, mostly for tax purposes. If the preferred stock is packaged as MIPS, QUIPS, and TOPrS, the dividend payments are deductible by the issuer.

What is Common Stock?
What is the difference between Common Stock and Preferred Stock?

Keywords: bonds, common stock, participating, callable, convertible, hybrid securities, MIPS, QUIPS, TOPrS,