What Is Preferred Stock?
Preferred stock refers to the stock that is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and the assets of the corporations in the event of liquidation.
Definition 2
Preferred stock is the type of bank capital measured by the par value of any shares outstanding that promise to pay their owners a fixed rate of return or (in the case of variable-rate preferred) a rate determined by an agreed-upon formula.
More Thorough Understanding of the Term
To appeal to more investors, a corporation may issue an additional class of stock called preferred stock. Preferred stock has provisions that give it some preference or priority over common stock. Typically, preferred stockholders have a priority as to (1) distributions of earnings (dividends) and (2) assets in the event of liquidation. However, they generally do not have voting rights.
Preferred investors have a preference over common stockholders in acquiring their part of the company's assets in the event of bankruptcy or liquidation. They remain, however, subordinate to bondholders and other creditors.
A firm can appeal to investors searching for a more secure investment choice by issuing preferred stock, as guaranteed dividends provide a continuous income stream. Furthermore, preferred stock is typically less volatile than common stock, making it an appealing option for risk-averse investors.
Pros and Cons of Preferred Stock
The primary benefits of preferred stock are that holders have a preference over common stockholders in obtaining distributions of earnings (dividends) and assets in the case of liquidation. It is crucial to note, however, that preferred investors typically do not have voting rights.
Pros:
- Preferred investors are paid a set dividend that is typically more than the dividend paid to common stockholders.
- Because preferred stock is less volatile than common stock, it is an appealing option for risk-averse investors.
- Preferred investors have a preference over common stockholders in acquiring their part of the company's assets in the event of bankruptcy or liquidation.
Cons:
- The fixed dividend payout may not increase over time, implying that the dividend's purchasing value may fall owing to inflation.
- Because preferred stock is less volatile than common stock, its potential returns are typically lower and may not keep up with inflation.
Examples
Example 1
In 2019, Coca-Cola issued preferred stock with a set annual dividend of $1.48 per share. This preferred stock trades on the NYSE under the ticker symbol KO-P and has a par value of $100 per share.
Example 2
In 2013, Apple issued preferred stock with a fixed annual dividend of $2.65 per share. This preferred stock trades on the NASDAQ under the ticker symbol AAPL-P and has a par value of $50 per share.
In Sentences
- Preferred stock is the shares that give owners limited voting rights and the right to receive dividends or assets before owners of common stock.
- Preferred stock is a class of stock that has a prior or senior claim on assets to that of common stock.
- Stock that has preference over common stock in the payment of dividends and in claims against the assets of the firm, but does not confer voting rights.