A preferred stock is an ownership stake in a public company, which unlike common stock, has a higher claim on its earnings and assets.
Stakeholders of preferred stock can, therefore, benefit by receiving high dividends during the good times when the corporation has made huge profits and decides to distribute the excesses to its shareholders.
Stakeholders of preferred stocks don’t have rights, but they have to get their dividends first before common stakeholders.
While common stakeholders may or may not receive dividends, based on what the board of directors decides, stockholders of preferred stock are assured of receiving a fixed dividend from the corporation.
In other words, preferred shareholders have an advantage over common shareholders on matters of dividends, whereby they are paid quarterly or monthly, and before common stocks.
It is, however, important to note that it is only during times of insolvency when preferred stockholders are likely to be prioritized over common stockholders in terms of dividend payout. Otherwise, both preferred and common stockholders are treated generally treated equally during normal times.
Shareholders Of Preferred Stock
Shareholders of preferred stock have a prior claim on the assets of a company in the event that it is liquidated. Nonetheless, they are subordinate to holders of bonds.
Although preferred shares are equity, they are in many ways hybrid assets lying between bonds and stocks.
They are rated by the leading crediting agencies of credit rating and their income can easily be predicted than common stock. Unlike with bondholders, failure to pay dividends to preferred shareholders doesn’t mean that a company is in default.
Considering that shareholders of preferred stocks don’t enjoy the same assurances as creditors, the preferred shares ratings tend to be lower than the bonds issued by the same issuer, with the returns being correspondingly higher.
A public company can issue preferred shares under nearly any terms, assuming they do not fall foul of regulations or laws. Lastly, most preferred issues don’t have maturity dates.