Preferred Stock

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Description of Preferred Stock. Explanation.


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Definition Preferred Stock. Description.

Preferred Stock is a class of equity that pays dividends at a specified (normally fixed) rate, regardless of corporate earnings, prior to the claim of common stockholders. In the case of bankruptcy / liquidation these stocks normally give its holder a claim on the assets of the company, also prior to the claim of common stockholders. As a result, the associated risk with owning this class of securities is lower than common stock.

The major drawbacks of this type of shares are that they normally do not profit from dividend increases of the common stocks, and they normally do not have regular voting rights associated with them.

Preferred Stocks can have a number of additional rights attached to them:

  • Special voting rights. See: Proportional Voting.

  • Anti-dilution provisions.

  • Right of first refusal with respect to issuing new shares.

  • Cumulative rights. The preferred dividend can be cumulative, in which case they will be carried forward if they are not paid in a particular year. Note that the process of deferring preferred dividends can go on indefinitely; cumulative dividends are not debts of the company.

  • Convertible rights.

  • A warrant.

  • Other rights.

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Compare with: Convertible Preferred Stock  |  Liquidation Value  |  Venture Capitalists  |  Warrant  |  Redemption Value

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