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Preferred Stock Features

Preferred stock differs from common stock in that it provides no voting rights, functions similarly to bonds by guaranteeing a fixed dividend, and has a higher claim on company assets than common stock. The dividend yield on preferred stock is calculated as the dividend amount divided by the stock price and is usually based on the par value, making it different from the variable dividends of common stock. Like bonds, preferred stock prices are affected by interest rate changes, but unlike common stock prices which are determined by supply and demand. Preferred stockholders have priority over common stockholders for dividend payments and liquidation claims. Preferred stock can also be called back by the company after a predetermined time period.

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141 views

Preferred Stock Features

Preferred stock differs from common stock in that it provides no voting rights, functions similarly to bonds by guaranteeing a fixed dividend, and has a higher claim on company assets than common stock. The dividend yield on preferred stock is calculated as the dividend amount divided by the stock price and is usually based on the par value, making it different from the variable dividends of common stock. Like bonds, preferred stock prices are affected by interest rate changes, but unlike common stock prices which are determined by supply and demand. Preferred stockholders have priority over common stockholders for dividend payments and liquidation claims. Preferred stock can also be called back by the company after a predetermined time period.

Uploaded by

LJBernardo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Preferred Stock

One main difference from common stock is that preferred stock comes with no voting rights. So
when it comes time for a company to elect a board of directors or vote on any form of corporate
policy, preferred shareholders have no voice in the future of the company. In fact, preferred stock
functions similarly to bonds since with preferred shares, investors are usually guaranteed a fixed
dividend in perpetuity.

The dividend yield of a preferred stock is calculated as the dollar amount of a dividend divided
by the price of the stock. This is often based on the par value before a preferred stock is offered.
It's commonly calculated as a percentage of the current market price after it begins trading. This
is different from common stock, which has variable dividends that are declared by the board of
directors and never guaranteed. In fact, many companies do not pay out dividends to common
stock at all.

Like bonds, preferred shares also have a par value which is affected by interest rates. When
interest rates rise, the value of the preferred stock declines, and vice versa. With common stocks,
however, the value of shares is regulated by demand and supply of the market participants.

In a liquidation, preferred stockholders have a greater claim to a company's assets and earnings.
This is true during the company's good times when the company has excess cash and decides to
distribute money to investors through dividends. The dividends for this type of stock are usually
higher than those issued for common stock. Preferred stock also gets priority over common
stock, so if a company misses a dividend payment, it must first pay any arrears to preferred
shareholders before paying out common shareholders.

Unlike common shares, preferreds also have a callability feature which gives the issuer the right
to redeem the shares from the market after a predetermined time. Investors who buy preferred
shares have a real opportunity for these shares to be called back at a redemption rate representing
a significant premium over their purchase price. The market for preferred shares often anticipates
callbacks and prices may be bid up accordingly.

Volume 75%
 

Why Is Preferred Stock Important?


Preferred stock gives you a financing alternative to taking on debt. You generally maintain
greater control over your company than if you issue new common shares.
You can also remain flexible for future financing rounds by keeping debt off of your balance
sheet and retaining a call option. The call option allows you to reduce your outstanding equity
and offer a greater portion of your company.

Preferred Stock Features


Preferred stock may carry optional features that benefit either the company or shareholders.
These are set out in the initial preferred stock agreement.
 Callable: A call option gives you the right to repurchase preferred shares at a fixed price
or par value after a set date. You have sole discretion whether to exercise the option.
 Cumulative: You may retain the right to suspend payment of dividends. If preferred stock
is designated as cumulative, the suspended dividends accumulate, and you must later pay
them in full.
 Participating: A participating feature gives preferred shareholders the right to receive a
share of dividends paid to common shareholders. This is in addition to preferred
dividends.
 Convertible: Convertible preferred shares may be exchanged for common shares. This
may happen at the option of the company, the shareholder or based on certain financial
conditions.
 Voting: Most preferred shareholders have no voting rights under normal circumstances.
Special voting rights may apply when dividends are suspended or the company is in
financial distress. This provides additional protection to preferred shareholders.
 Adjustable Rate: The dividend rate may vary based on external factors. This provides
protection against changes in inflation or interest rates.
 Preference: If the company has multiple issues of preferred stock, the preferred stock may
be ranked by priority with the highest being prior, followed by first preference, second
preference, etc.
 Trust Preferred Stock: A form of preferred stock that can act as debt from a tax
perspective, but is seen as common stock on the balance sheet

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