Series 79: A1.5.2. Preferred Stock

A1.5.2. Preferred Stock

Preferred stock, sometimes called preferred shares, preference shares, or preferred, is a form of equity interest that shares many characteristics with bonds, notably the right to a fixed periodic payment. Preferred shares are most prevalent in privately held companies, but many public companies issue one or more classes of preferred shares. While their share values may fluctuate, preferred stockholders generally are not able to profit directly from a company’s earnings growth in the same way that common stockholders do.

Preferred stock is much less “common” than common stock, in the sense that the total number and cumulative market value of preferred shares are much lower than the equivalent figures for common equity. The rights of preferred stockholders differ from those of common stockholders in several important respects. For example, unlike common shareholders, preferred shareholders usually do not have voting rights. The two most significant differences between common and preferred stock relate to entitlement to dividends and to a higher priority of claims on the company’s assets in bankruptcy or liquidation.

As they can do with common stock, issuers may issue different classes of preferred stock. The primary distinction between these classes is the degree of priority for payment of dividends and claims on the company’s assets in liquidation. Prior preferred stock has the highest priority, and holders are entitled to receive dividends before all other preferred stockholders. The redundant-sounding preference preferred stock is next in line, with priority higher than all classes other than prior preferre