In finance, preferred stock refers to a type of stock that has a higher claim on a company’s assets and earnings than common stock. Preferred stockholders have a preferential right to receive dividends and other distributions from the company, and they are typically paid before common stockholders. In the event that the company goes bankrupt, preferred stockholders also have a higher claim on the company’s assets than common stockholders.
Preferred stock is different from common stock in several key ways. Unlike common stock, preferred stock does not usually carry voting rights, which means that preferred stockholders do not have a say in the management of the company. Preferred stock also typically has a fixed dividend, which means that the company is obligated to pay the same amount of dividend to preferred stockholders each period. In contrast, the dividends paid to common stockholders can vary from period to period, depending on the company’s earnings and financial performance.
Preferred stock is a hybrid security that combines some of the characteristics of debt and equity. It offers investors a higher level of income than common stock, but it also has a higher level of risk, since the company’s ability to pay dividends on preferred stock is dependent on its financial performance. Preferred stock is often considered a less volatile investment than common stock, but it can also be less profitable in a strong economy.
Some examples of companies that offer preferred stock include:
- Banks and other financial institutions often issue preferred stock to raise capital and finance their operations.
- Utility companies, such as electric and gas utilities, may issue preferred stock to finance the construction of new infrastructure.
- Real estate investment trusts (REITs) often use preferred stock to raise capital for the acquisition and management of properties.
- Telecommunications companies may issue preferred stock to fund the expansion of their networks and the development of new technologies.
In summary, preferred stock is a type of stock that has a higher claim on a company’s assets and earnings than common stock. It typically carries fixed dividends and does not have voting rights, and it is considered a hybrid security that combines some of the characteristics of debt and equity.