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Preferred stock

From Academic Kids

A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock.

Contents

Rights

Such rights may include:

  • a dividend amount that never changes, if the dividend is paid at all. The dividend is usually specified as a percentage of the initial investment and/or a stock symbol letter, such as Pacific Gas & Electric 6% Preferred A. Variable preferreds are rare exceptions: their changing dividends depend on prevailing interest rates, or nowadays on ratings.
  • precedence over shares of common stock when it comes to the distribution of profits and the liquidation proceeds of a stock corporation
  • superior voting rights generally, or special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, many preferred shares provide no voting rights
  • anti-dilution provisions that prevent the issuance of additional shares at prices below those of the preferred shares
  • right of first refusal with respect to the issuance of new shares
  • dividend rights or cumulative dividend rights (cumulative dividend rights accumulate during periods when they are not paid).
  • when a company goes bankrupt and has to liquidate assets the preferred stockholders get paid first, if possible.

The above list, although including several customary rights, is far from comprehensive. Preferred shares, like other legal arrangements, may specify nearly any right conceivable.

Users

Preferred shares are more common in private companies, where it is more useful to distinguish between the control of and the economic interest in the company. Also, government regulations and the rules of stock exchanges discourage the issuance of publicly traded preferred shares.

A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred", "Series B Preferred", "Series C Preferred" and common stock.

Common types

There are various types of preferred stocks that are common to many corporations:

  • Cumulative Preferred Stock - This type of stock is almost like a corporate bond in the sense that the company is obligated to pay the dividend if it makes a profit. In the case of a loss, the dividend will accumulate and has to be paid in future years.
  • Non-cumulative Preferred Stock - Dividend for this type of preferred stock will not accumulate if it is unpaid.
  • Convertible Preferred Stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price.
  • Participating Preferred Stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions.

See also

External links

  • Quantum Online (http://www.QuantumOnline.com) - a website regarding information on preferred stocks and other exchange-traded income investments.
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