What is the Preferred Stock of a Company?

Preferred Stock: TL;DR

Preferred stock refers to a type of share that gives its holders a higher claim on a company's earnings and assets than common stockholders. Preferred shareholders receive dividends before common shareholders and have a fixed dividend rate. However, they typically do not have voting rights in the company.

Preferred Stock = Higher claim on earnings + Fixed dividends - Voting rights

In-Depth Understanding

Preferred stock can be considered a hybrid between common stock and bonds. The "preference" in preferred stock refers to the dividends and liquidation proceeds distribution. Preferred shareholders receive their dividends before common shareholders, and these dividends are usually fixed and not tied to the company's profitability. If a company is liquidated, preferred shareholders also get paid before common shareholders.

Despite these benefits, preferred stockholders usually do not have voting rights in the company. This lack of control makes preferred stocks less attractive to investors who wish to participate in the company's decision-making process.

There are different types of preferred stocks, including cumulative preferred, which requires all missed dividends to be paid before common dividends are paid, and convertible preferred, which can be converted into common stock.

Real-world Examples

A Technology Company - IBM

IBM has issued preferred stock in the past to raise capital. The holders of these preferred shares receive their fixed dividends before any dividends are paid to common shareholders.

A Financial Institution - Wells Fargo & Company

Wells Fargo has several series of preferred stocks. The dividends for these stocks are paid out on a quarterly basis and they accumulate if not paid. However, the preferred shareholders do not have voting rights.

An Energy Company - Dominion Energy, Inc.

Dominion Energy has issued preferred stock to finance its operations. These preferred stocks pay out dividends at a fixed rate before any dividends are paid to common stockholders. Some of these preferred stocks are also convertible into common stock.