Preferred stock
The term describes a particular kind of stock, whose owners have a more senior claim on the earnings, including dividends, and assets of a business than common stock.
Generally, it is possible to distinguish between two types of stock – common stock and preferred stock. Preferred stockholders possess a greater entitlement to dividends or the allocation of assets in comparison to common stockholders. The specifics of each type of preferred stock differ on the particular issuance. In matters of dividends, preferred shareholders are given precedence over common stockholders, typically resulting in higher yields than common stock. These dividends may be disbursed on a monthly or quarterly basis. Instead of being a fixed amount, these dividends might be determined by a reference interest rate, like LIBOR, and are commonly expressed as a percentage in the issuance documentation.
Adjustable-rate shares define specific factors that impact the dividend payout, while participating shares have the potential to receive extra dividends calculated based on either common stock dividends or the company’s profits. The decision to distribute dividends is made at the discretion of the company’s board of directors.
Differing from common stockholders, those who hold preferred stock possess restricted rights, typically excluding voting privileges. Preferred stock amalgamates characteristics of debt, as it offers predetermined dividends, and equity, as it holds the potential for value appreciation. This arrangement is attractive to investors who aim for stability in potential forthcoming cash streams.
There are different types of preferred stock:
- Prior preferred stock – while regular preferred stock and prior preferred stock both have priority over common stock, prior preferred stock specifically denotes an earlier issuance of preferred stock that holds superior precedence.
- Preference preferred stock – preference preferred stock is regarded as the subsequent level of stock concerning prioritization.
- Perpetual preferred stock – in the majority of instances, preferred stock is viewed as perpetual, indicating that the initial invested capital will not be reimbursed.
- Convertible preferred stock – convertible preferred stock enables a shareholder to convert their preferred stock into common stock shares. This conversion can take place at the shareholder’s discretion, irrespective of the prevailing prices of either type of share.
- Cumulative preferred stock – this implies that if a company releases a dividend but fails to distribute it, the unpaid dividend is accrued and must be disbursed in a subsequent period.
- Noncumulative preferred stock – this indicates that if a company doesn’t provide a dividend in a particular year, the dividend that was not paid during that time is not immediately compensated for in a subsequent period.
- Participating preferred stock – in certain instances, a company might determine that it lacks the financial capability to distribute a dividend. Nevertheless, holders of participating preferred stock could still retain the right to receive a dividend.
