What are Preferred Stocks

by Investing School on May 7, 2010

Preferred stock is also referred to as preferred shares or preference shares. This refers to shares that are of a higher quality or “higher ranking” than common stock. The terms of purchasing this type of stock is negotiated between the investor and the corporation.

One of the characteristics of preferred stock is that it does not come with any voting rights. But, it usually has priority over common stock when it comes to receiving payment of dividends when stock has been liquidated. Preferred stock also may carry a convertibility feature which would allow transfer over to common stock when the investor deemed fit. Stockholders that have preferred stock will receive payment of assets before common stockholders but after debt holders in the unfortunate event of a bankruptcy. When preferred stockholders receive their stock, the terms of their agreement are stated in the “Certificate of Designation”.

There are different types of preferred stock. There is Prior Preferred Stock which is stock that usually has a lower yield than other preferred stock. If a company only has enough money to pay out dividends on one of the preferred issues then the Prior Preferred Stock will be paid. There is, of course, the disadvantage of the lower yield.

Then there is Preference Preferred Stock. This is stock that is rank behind the company’s prior preferred stock. These issues receive payment preference over all the other classes of stock except prior preferred.

Convertible Preferred Stock refers to stock that the stockholders can exchange for a certain amount of common stock.

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{ 1 comment… read it below or add one }

Mike May 7, 2010 at 1:54 pm

Is anyone else worried by the precedent set by the Obama administration with the GM bailout? The bond holders should have gotten paid when GM liquidated their assets, but they didn’t. This makes me question whether the special status granted to preferred stocks is all that real in this environment…


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