Preferred Stock

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Dave Cleveland

Preferred Stock, or preferred shares, refer to shares in a company that carry different rights than common stock. Both types of shares represent the holder's stake in a company, however holders of preferred stock have a claim on a company's assets and earnings before the holder of common shares. This means that holders preferred stock will be paid dividends before the any common shareholders and, in the case of liquidation or bankruptcy, the preferred shareholders will have a claim on the assets of a company before the common shareholders.

In the U.S. there are two types of preferred stock: convertible preferred shares and straight preferred shares. Convertible preferred shares give the holder the right, but not the obligation, to exchange their preferred shares for a common stock at a fixed price, after a specific date. Straight preferred shares simply give the holder rights that common shareholders do not have.

These rights can include things like a pre-determined dividend payment (which could be either fixed or floating), or special voting rights. The rights of preferred stock will vary from company to company, but the general idea is that the preferred shareholders pay a premium for the right to the to an earlier claim on a company's assets or earnings. In this sense, preferred shareholders are paying a premium to receive less risky shares in a company.