Preferred Stock

Beginner

Preferred stock is a type of share that usually pays a fixed dividend and has priority over common stock for dividends and for repayment if the company is wound up, but typically carries no voting rights.

Preferred stock sits between bonds and common stock. Like a bond, it often pays a fixed amount each year. Like a share, it represents ownership and has no fixed repayment date in many cases.

Preferred stockholders must receive their dividends before any dividends can be paid to common stockholders. Many preferred shares are cumulative, which means that if the company skips a dividend, the missed amount must be paid later before common stockholders get anything.

For example, a preferred share with a face value of 100 and a 6% dividend rate pays 6 a year. If the company cannot pay one year, a cumulative preferred share would be owed 12 the next year before common shareholders receive any dividend.

In a bankruptcy, preferred stockholders are paid after lenders and bondholders but before common stockholders. In return for this greater safety, they usually give up voting rights and the potential for large gains, because their dividends do not usually rise when the company does well.

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