Preferred stock
Also known as: preference shares, preferred shares
Preferred stock is an equity security that pays a fixed dividend and has priority over common stock for dividends and liquidation proceeds. It typically carries no voting rights and trades more like a bond than common stock.
Preferred stock is a class of equity that sits between bonds and common stock in a corporation's capital structure. Preferred shareholders receive a fixed dividend — usually stated as a percentage of a $100 par value, so 6% preferred pays $6 per share annually — and must be paid in full before any dividend goes to common shareholders. In a liquidation, preferred stockholders also rank ahead of common, though behind all creditors and bondholders.
The trade-off is limited upside and limited control. Preferred stock generally carries no voting rights, and because its dividend is fixed, its price does not rise with corporate earnings the way common stock can. Instead, preferred prices move mainly with interest rates: when rates rise, existing preferred shares with lower fixed dividends fall in value, making preferred stock behave much like a long-term bond.
Several features modify the basic contract. Cumulative preferred accrues any skipped dividends, which must be paid before common dividends resume. Participating preferred can receive extra dividends beyond the stated rate. Convertible preferred can be exchanged for a fixed number of common shares, letting holders capture common-stock upside. Callable preferred can be redeemed by the issuer, typically after rates fall.
Preferred stock appears across securities exams. The Series 6, Series 65, and Series 66 all test the fixed dividend, priority over common stock, interest-rate sensitivity, and the distinctions among cumulative, participating, convertible, and callable preferred — including which features benefit the investor and which benefit the issuer.
Key takeaways
- Preferred stock pays a fixed dividend, typically stated as a percentage of $100 par value.
- Preferred shareholders have priority over common shareholders for dividends and liquidation proceeds, but rank behind bondholders.
- Preferred stock usually has no voting rights, and its price is sensitive to interest rates, like a bond.
- Cumulative, participating, convertible, and callable features change the risk and return profile of a preferred issue.
- The Series 6, 65, and 66 exams test preferred stock features and their suitability for income-focused investors.