What Is Preferred Stock?

What Is Preferred Stock?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Preferred stock, also known as preferred shares, is a category of company ownership that gives its holders a higher claim on income and assets compared to common stockholders. Often, this means that preferred stockholders are first in line when it comes to dividend payments, and in the event of liquidation, they also have a higher claim on any remaining assets. Unlike common shareholders, preferred shareholders usually do not have voting rights in the company.

Related Questions

1. How Does Preferred Stock Benefit Investors?

Preferred stock can be a good investment for those looking for regular income because it typically pays fixed, relatively high dividends. Also, in case of company failure, preferred shareholders have a higher claim to the company’s assets than common shareholders.

2. What’s the Difference Between Preferred Stock and Common Stock?

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While common stockholders have voting rights, preferred shareholders usually do not. On the other hand, preferred shareholders have a higher claim on dividends and assets. Preferred stock often pays higher dividends than common stock.

3. Can Preferred Stock be Converted into Common Stock?

Yes, some types of preferred stock, known as convertible preferred stock, can be converted into a certain number of common shares. The details of the conversion process are established in the share prospectus at the time of issuance.

4. Who Typically Buys Preferred Stock?

Risk-averse investors looking for regular income may buy preferred stock because it often offers higher dividends compared to common stock. Additionally, corporations might buy preferred stock because a portion of the dividends can be tax-deductible.

5. Is Preferred Stock a Good Investment?

The answer depends on your risk tolerance and investment goals. Preferred stock can be a good choice if you’re looking for regular income and lower risk. However, they can be less suitable for those seeking capital appreciation or voting rights in a company.