Preferred stock

Definition

Preferred stock is a class of ownership in a corporation with a higher claim on assets and earnings than common stock. Preferred shares typically have fixed dividends and may come with additional rights, such as the ability to convert to common stock.

5 Must Know Facts For Your Next Test

1. Preferred shareholders receive dividends before common shareholders.
2. Preferred stock dividends are usually fixed and do not fluctuate like common stock dividends.
3. In the event of liquidation, preferred shareholders have priority over common shareholders but are subordinate to debt holders.
4. Preferred shares often do not carry voting rights, unlike common shares.
5. Some preferred stocks can be converted into a specified number of common shares, known as convertible preferred stock.

Review Questions

• What is the primary difference between preferred stock and common stock in terms of dividend payments?
• Why might an investor choose to purchase preferred stock instead of common stock?
• In what order are claims on assets satisfied in the event of a company's liquidation?

Related terms

Common Stock:

Represents ownership in a corporation with voting rights but lower priority on assets and earnings compared to preferred stock.

Convertible Preferred Stock: A type of preferred share that can be converted into a predetermined number of common shares.

Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its share price.