Types of Stock

By the end of this article, you will be able to define common stock and preferred stock and differentiate between these two 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.


LEARNING OBJECTIVE

  • Describe the rights and obligations of preferred stock

KEY POINTS

    • Preferred Stock is a security which has characteristics of both equity and debt securities.
    • Preferred Stock shareholders have rights to dividends and assets (in the case of bankruptcy) before Common Stock shareholders.
    • Preferred stockholders have a number of rights which will vary based on the business entity, but generally do not carry voting rights.

TERMS

  • Preferred Stock

    Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher ranking than common stock.

  • bond

    A bond is an instrument of indebtness of the bond issuers toward the bond holders.


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 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 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 in 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 with regards to 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.