Preferred Stock: What Is It
What is preferred stock is the first question many people ask when they hear about it whether it is in a news story or a stock tip. The definition for preferred stock is a stock which pays a set dividend rate which has preference in being paid before any dividends are paid to investors in common stock. This pay first concept is what gives preferred stock its name. However, most preferred stock carries no voting rights.
In the event of a corporate liquidation, preferred stock holders are compensated before the owners of common stock. However, this has little practical value because preferred stock holders are behind all bond holders in such an event and it is rare that all bond holders are made whole in such a situation.
Different types of preferred stock include:
Cumulative Participating Preferred Stock
--Preferred stock that accumulates any dividend that is not paid such that all back dividends must be paid before common stock dividends can be paid, and which participates in additional company profit via common dividend as well.
Non-Cumulative Participating Preferred Stock
--Similar to Cumulative Participating Preferred Stock except that if a dividend payment is missed, it is simply lost and will not be made up.
Non-Participating Preferred Stock is only paid the stated dividend regardless of company profits and payment of higher dividends to other stockholders.
Convertible Preferred Stock
--In addition to being paid the stipulated preferred dividend, the stock may be converted into a certain number of common stock shares.
Adjustable-Rate Preferred Stock
--While the dividend rate still holds preferred payment status, the amount of the payment varies depending upon current interest rates.