Preferred stocks, also called preferred shares, are a type of investment security that has higher priority to common stock on asset claims of a company but lesser than bonds. Preferred stocks typically do not carry any voting rights attach. However, the appeal for investors are the preferred stock dividends that are paid to shareholders and, usually, the right to convert preferred shares into common stock.
Advantages of Preferreds
- Preferred stocks receive preference when a company pays dividends
- Shareholders of preferred stocks also receive preference in a company's assets in the event a liquidation sale
- Preferred shares do not carry voting rights, though usually can be converted into common stock
- Investors can enjoy a hybrid investment instrument that combines features of stocks and bonds
Generally speaking, the main appeal of holding preferred stock for investors is the stock's dividend payout. Dividends of preferred shares may accumulate cumulatively or may be paid out to the investor within a specific time frame such as yearly, monthly, or quarterly. Any dividends not claimed on a preferred stock by the investor at the time that they are paid out are lost. The type of preferred share that pays out dividends within a specific time frame is usually known as a non-cumulative or straight preferred stock.
Investing in Preferred Shares
Investors need to understand that there are pros and cons to holding preferred stock, like any investment. The value of preferred shares may have a fixed value that they can be sold for which is called a par value or a liquidation value. This usually is the amount of money that was given to a company at the time when the preferred shares were first purchased. In addition, preferred stock usually has dividends of an amount that is negotiated and fixed and this is usually stated as a certain percentage of the stock's initial value. Preferred shares may have special voting rights in certain extraordinary situations, such as in the election of new directors or when a company decides issue new shares or when the company acquires ownership of another company.