Preferred Stock

What Is Preferred Stock ?

Preferred stock ⇒ is a hybrid, or cross, between common stock and bonds. In some ways, preferred stock is similar to common stock and in some ways, it is similar to bonds.

The cost of preferred stock is generally higher than the cost of bonds because there is more risk associated with preferred shares than with bonds.

Preferred stock is similar to BONDS in :

1. Preferred stockholders usually do not vote on issues at the annual meeting.
2. Preferred stock usually pays, or earns, a fixed annual payment in the form of a dividend. Preferred dividends are usually a percentage of the par value . Because the dividend amount is set when the preferred stock is issued, the dividend is similar toan interest payment on debt.
3. Preferred shareholders receive preference over common shareholders in an asset distribution in a liquidation (though preferred shareholders have a lower priority than bondholders).
4. Preferred stockholders generally receive dividends before common stockholders.
5. Preferred stocks are often issued with bond-like features.

Preferred stock is similar to COMMON STOCK in :

1. Not paying preferred dividends during times of financial distress does not breach a contract and cannot result in bankruptcy proceedings.
2. Preferred dividends are paid after interest and taxes. Therefore, like common dividends, the dividends paid on preferred stock are not tax-deductible for the firm.
3. In the event of asset distribution in a liquidation, preferred shareholders are junior to bondholders and other creditors. However, preferred shareholders are senior to common shareholders in a liquidation and will receive money before common shareholders receive anything.