If before, we touched on common stock, today the author will explain what is preferred stock.
Preferred stock is stock that is given certain rights as opposed to common stock. Preferred shares have higher dividend payments and asset claims if the company is liquidated.
In addition, the party issuing the preferred shares has the right to redeem the shares in question at a predetermined price and date as indicated in the proposition.
In many ways, preferred stocks have the same characteristics as bonds and because of that, these stocks are often referred to as hybrid securities.
Preferred stock also incorporates a debt feature because the stock pays a fixed dividend and is a potential equity. The features appeal to investors looking for stability in future cash flows.
Preferred stocks offer more predictable earnings than common stocks and are rated by major credit rating agencies.
Preferred shareholders have higher dividend claims or asset distributions than ordinary shareholders.
Preferred stock dividends are higher and and can be paid monthly or quarterly.
The dividend rate is fixed or determined in terms of a benchmark interest rate such as the London InterBank Offered Rate (LIBOR) and is often referred to as a percentage in the derivative statement.
Unlike ordinary shareholders, preferred shareholders have limited rights that normally do not include voting.
Preferred shares typically do not have voting rights although under some agreements, these rights can be returned to shareholders who have not yet received their dividends.
Preferred shareholders are entitled to claim the assets of a company if it is liquidated. Preferred stock is equity but it is also a hybrid asset that lies between stocks and bonds.
If a company is in trouble and is forced to defer its dividend, the preferred shareholder has the right to receive the arrears of payment before the dividend is given to the ordinary shareholders. Shares that have such an arrangement are known as cumulative.
Unlike bondholders, failing to pay dividends to preferred shareholders does not mean a company is in default.
Preferred stocks come in many forms and are usually purchased through stockbrokers online by individual investors.
A company can issue preferred shares on any condition as long as they do not violate laws or regulations. Most preferred stocks do not have a maturity period.
Typically, institutions are buyers of preferred stock. This is due to certain tax advantages that are available to them and not available to individual investors.
Institutions often make large-scale purchases of preferred stock because preferred stock is the easiest way to raise large amounts of capital.
