Preferred Stock
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Definition of 'Preferred Stock'
Preferred stock is a type of equity security that has a higher claim on a company's assets and earnings than common stock. Preferred stockholders receive their dividends before common stockholders, and their dividends are typically fixed. Preferred stock can also be convertible into common stock, which gives investors the option to convert their preferred shares into common shares at a predetermined price.
There are two main types of preferred stock:
* **Cumulative preferred stock**. Cumulative preferred stock entitles its holders to receive all past due dividends before common stockholders receive any dividends. If a company fails to pay a dividend on its cumulative preferred stock, the unpaid dividends accumulate and must be paid in full before any dividends can be paid to common stockholders.
* **Non-cumulative preferred stock**. Non-cumulative preferred stock does not entitle its holders to receive past due dividends. If a company fails to pay a dividend on its non-cumulative preferred stock, the unpaid dividends are lost.
Preferred stock can be a good investment for investors who are looking for a high level of income and who are willing to accept a lower level of risk than common stock. However, preferred stock is not as liquid as common stock, and it may be more difficult to sell preferred stock if you need to do so.
Here are some of the advantages and disadvantages of investing in preferred stock:
**Advantages of investing in preferred stock:**
* Preferred stock typically pays a higher dividend than common stock.
* Preferred stockholders have a higher claim on a company's assets and earnings than common stockholders.
* Preferred stock can be convertible into common stock, which gives investors the option to convert their preferred shares into common shares at a predetermined price.
**Disadvantages of investing in preferred stock:**
* Preferred stock is not as liquid as common stock.
* Preferred stock may be more difficult to sell if you need to do so.
* Preferred stockholders do not have voting rights.
There are two main types of preferred stock:
* **Cumulative preferred stock**. Cumulative preferred stock entitles its holders to receive all past due dividends before common stockholders receive any dividends. If a company fails to pay a dividend on its cumulative preferred stock, the unpaid dividends accumulate and must be paid in full before any dividends can be paid to common stockholders.
* **Non-cumulative preferred stock**. Non-cumulative preferred stock does not entitle its holders to receive past due dividends. If a company fails to pay a dividend on its non-cumulative preferred stock, the unpaid dividends are lost.
Preferred stock can be a good investment for investors who are looking for a high level of income and who are willing to accept a lower level of risk than common stock. However, preferred stock is not as liquid as common stock, and it may be more difficult to sell preferred stock if you need to do so.
Here are some of the advantages and disadvantages of investing in preferred stock:
**Advantages of investing in preferred stock:**
* Preferred stock typically pays a higher dividend than common stock.
* Preferred stockholders have a higher claim on a company's assets and earnings than common stockholders.
* Preferred stock can be convertible into common stock, which gives investors the option to convert their preferred shares into common shares at a predetermined price.
**Disadvantages of investing in preferred stock:**
* Preferred stock is not as liquid as common stock.
* Preferred stock may be more difficult to sell if you need to do so.
* Preferred stockholders do not have voting rights.
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