Types of Stock

Preferred Stock

Preferred stock usually carries no voting rights but may carry a dividend, have priority over common stock upon liquidation, and/or have other benefits. Preferred stock (also called preferred shares, preference shares, or simply preferreds) is an equity security with properties of both an equity and a debt instrument and is generally considered a hybrid instrument.

It is senior (i.e., higher ranking) to common stock but subordinate to bonds in terms of the claim (or rights to their share of the assets of the company). In other words, in the case of liquidation or bankruptcy, preferred stock will have a claim to assets before common stock but after corporate bonds or other debt instruments.

Bond Preferred Stocks are considered a hybrid security with properties of both stocks and bonds, but are subordinate to bonds when it comes to rights of claim to company assets.

Preferred stock usually carries no voting rights but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation. The specific terms of owning preferred stock are specified in a certificate of designation. The features and rights which are generally associated with preferred stock are as follows:

• Preference in dividends
  
  
• Preference for assets in the event of liquidation
  
  
• Convertibility to common stock
  
  
• Callability, at the option of the corporation
  
  
• Nonvoting rights.

Similar to bonds, preferred stocks are rated by the major credit-rating companies. The rating for preferreds is generally lower since preferred dividends do not carry the same guarantees as interest payments from bonds, and they are junior to all creditors.

Details regarding the rights associated with preferred stock will vary with the business entity that issues the shares, and preferred stock can come in a number of different classes. Some examples are prior preferred stock (highest priority), preference preferred stock, convertible preferred stock (exchangeable for common stock), cumulative preferred stock, exchangeable preferred stock, participating preferred stock, putable preferred stock, monthly income preferred stock, and non-cumulative preferred stock.