Preferred Stock
Preferred stock is a hybrid security with features of both stocks and bonds, offering fixed dividends and priority over common stock in liquidation.
Exam Tip
Cumulative preferred must receive ALL missed dividends before common gets any.
What is Preferred Stock?
Preferred stock is a class of ownership that has a higher claim on assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have priority in bankruptcy.
Key Characteristics
| Feature | Description |
|---|---|
| Dividends | Fixed rate, paid before common stock |
| Voting Rights | Usually none |
| Liquidation Priority | Paid before common, after bonds |
| Price Behavior | More stable, similar to bonds |
Types of Preferred Stock
- Cumulative - Missed dividends accumulate and must be paid before common dividends
- Non-cumulative - Missed dividends are lost forever
- Convertible - Can be exchanged for common stock
- Callable - Issuer can buy back at a set price
- Participating - May receive extra dividends beyond the fixed rate
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Related Terms
Common Stock
SecuritiesCommon stock is a security representing ownership in a corporation, giving shareholders voting rights and potential dividends.
Dividend
SecuritiesA dividend is a distribution of a portion of a company's earnings to shareholders, typically paid quarterly in cash or additional shares.
Bond
SecuritiesA bond is a fixed-income debt security where the issuer owes the holder a debt and pays interest (coupon) plus principal at maturity.