Rules and Rights of Common and Preferred Stock

Preferred stock may be entitled to numerous rights, depending on what the issuer designates. One of these rights may be the right to cumulative dividends. Preferred stock shareholders already have rights to dividends before common stock shareholders. However, cumulative preferred shares contain the provision that should a company fail to pay out dividends at any time at the stated rate, then the issuer will have to make up for it as time goes on.

Historical dividend information for Franklin Automobile Company Dividends is one of the privileges of stock ownership, and preferred shares get more rights than common shares do.

Convertible preferred stock can be exchanged for a predetermined number of company common stock shares. Generally, this can occur at the investor's discretion, and he or she may pick any time to do so and, therefore, take advantage of fluctuations in the price of common stock. Once converted, the common stock cannot be converted back to preferred status.

Often, companies retain the right to call or buy back preferred shares at a predetermined price. These are callable shares.

There is a class of preferred shares known as "participating preferred stock." These preferred issues allow holders to receive extra dividends if the company achieves predetermined financial goals. Investors who purchase these stocks receive their regular dividend regardless of company performance (assuming the company does well enough to make its annual dividend payments). If the company achieves predetermined sales, earnings, or profitability goals, the investors receive an additional dividend.

Almost all preferred shares have a negotiated, fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. Sometimes, dividends on preferred shares may be negotiated as floating; they may change according to a benchmark interest-rate index or floating rate. An example of this would be tying the dividend rate to LIBOR.