Preferred Stock

Preferred Stock ## What is Preferred Stock? Preferred stock is a hybrid security — it has features of both a stock (it's equity, representing ownership) and a bond (it pays a fixed dividend like bond interest). Companies issue preferred stock to raise capital without diluting voting rights or taking on debt. Think of it this way: If common stock is a general partnership where everyone shares equally in wins and losses, preferred stock is more like being a senior partner who gets paid first — but doesn't get to vote. --- ## Key Features of Preferred Stock Fixed Dividend Preferred shares pay a stated dividend (usually expressed as a percentage of par value or a fixed dollar amount). For example, a $100 par preferred paying 6% = $6/year per share. This dividend is paid before any dividends can be paid to common stockholders. Preferred stockholders don't benefit when earnings soar — they get their fixed amount and that's it. Priority in Liquidation If the company goes bankrupt: 1. Secured creditors 2. Unsecured bondholders 3. Preferred stockholders ← here 4. Common stockholders Preferred stockholders get paid before common holders, but still after all creditors. Typically No Voting Rights The trade-off for getting paid first: preferred stockholders usually give up their vote. The company retains control without preferred holders interfering in corporate governance. --- ## Types of Preferred Stock (The Series 7 Tests These) Cumulative Preferred If the company skips a dividend (called a "passed" or "omitted" dividend), those missed payments accumulate and must be paid in full before common stockholders receive anything. > Example: A company skips preferred dividends for 2 years ($6/year). In year 3, before paying any common…