Preferred Stock

A preferred stock is a special equity security which shows the properties of both equity and debt instrument. It is also called as preferred shares, preference shares and preferreds. Preferred stock is generally considered as a hybrid instrument. When compared to common stock it is higher ranking. But preferred shares are subordinate to bonds. These stocks do not carry any voting rights. It can carry a dividend and have priority over common stock in the payment of dividends and upon liquidation. Terms related to preferred stock are generally mentioned in a ‘Certificate of Designation’. Many major credit rating companies rate preferred stocks.

Features of preferred stocks

Preferred stocks have many features that make it different from common stock. Preferred stocks have preference in dividends. It has preference in assets in the event of liquidation. Preferred stock can be converted easily to common stock. At the option of the corporation it is callable. Preferred shares have preference to dividends payments. They can be cumulative or non cumulative. Preferred stocks have fixed liquidation or par value sometimes. The amount of capital contributed to the corporation when the shares were first issued is thus represented. Preferred stocks have claim on liquidation proceeds of Stock Corporation. It is equivalent to the par value or liquidation value unless otherwise negotiated. Preferred stocks have negotiated fixed dividend amount. The dividend is normally mentioned as a percentage of the par value. To approve certain extraordinary events like issuance of new shares some preferred stocks have special voting rights.

Types of preferred stock

Various companies have different issues of preferred shares outstanding at the same time and the one with highest priority is referred as Prior Preferred Stock. If the company is able to give enough money to meet the dividend schedule on preferred issues then the dividend payment will be made on prior preferred. A company’s preference preferred issue is next to its prior preferred stock. Preference preferred issues receive importance over all other classes of company. If there are different issues that are preference preferred, the issues will be ranked based on their relative seniority. Convertible preferred stocks are preferred issues that can be easily exchanged for a predetermined number of the company’s common stock. If a company is not paying the dividend regularly, it will accumulate and will be known as cumulative preferred stock. Preferred issues carrying embedded option to be exchanged for security upon certain conditions are known as exchangeable preferred stock.

Questions:

• What do you mean by preferred stock?
• What are the features of preferred issues?