Preferred Stock

Preferred stock is a class of stock that has preference over common stock in respect to dividends and liquidation proceeds. 

Preferred stock generally pays a fixed percentage of par value. 

The four most common types of preferred stock are cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. 

With cumulative preferred stock, any preferred dividends missed by the company accrue. These unpaid preferred dividends must be paid before dividends are paid to common stockholders. With non-cumulative stock, unpaid dividends are not accrued.  

With participating preferred stock, preferred shareholders can receive a dividend in addition to the fixed dividend. This extra, or participating dividend, is usually tied to company profits. Participating preferred stock is a less commonly issued form of preferred stock. 

Convertible preferred stock contains an embedded option that allows the preferred stockholder to convert the preferred shares into common stock at a specified price. This price is generally set above the current market price at issuance. Because of the value of the conversion feature, convertible preferred shares usually offer a lower dividend yield than nonconvertible preferred shares.  

Unlike common stock, preferred stock typically does not contain voting rights. Therefore, unlike common stockholders, preferred stockholders do not participate in the governance of the company. 

Preferred stock is usually callable, meaning that the issuing company can redeem the preferred shares from investors at a stated price.  

Preferred stock is presented on the balance sheet in the owners’ equity section.