What is Preferred Stock?

Preferred Stock is its own unique type of stock.

When you buy preferred stock, you are called a Preferred Shareholder.

As a preferred shareholder, you usually do not have Voting Rights.  So when important company decisions are voted on, you don’t have a vote.

Since you don’t have a voice in the company, many investors don’t consider preferred stock actual ownership in the company.

As a preferred shareholder, you are entitled to a dividend.  A preferred stock dividend is usually a predetermined, fixed amount that’s paid on a regular schedule.

Many investors like this fixed dividend because they know the exact amount they are going to get each dividend payment.  And it resembles the coupon payments of a bond.  But the Board of Directors can vote to not give you a dividend.

There are a lot of different types of preferred stock and each has unique benefits and limitations.  For example, assume the company doesn’t pay you a dividend.  If you own Cumulative Preferred Stock, the company must pay you all the missed dividends at a later date.  If you own Non-Cumulative Preferred Stock, the company doesn’t pay you any missed dividends.

As a preferred shareholder, you have moderate risk.  If the company goes bankrupt, preferred shareholders are not the first investors to get paid back.  The company must first pay back its Creditors, who are investors that loaned it money.  Then the company pays preferred shareholders, and finally it pays common shareholders, which is the other type of stock. But there is a risk that there won’t be any money left after the company pays its Creditors.

You also have moderate reward potential.  As long as the company is stable, you will most likely get paid your dividend. But if the company becomes more profitable, you won’t get a share of the additional profits because your dividend is fixed.  That also means your share price will most likely remain stable and not increase

Remember, preferred stock is its own unique type of stock, so make sure you know the characteristics of a preferred stock before buying it.

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