preferred stock
A class of stock that pays fixed dividends and has priority over common stock in claims on assets during liquidation, but typically lacks voting rights.
Example
“The preferred stockholders received their $2/share dividend before any money was distributed to common shareholders.”
Memory Tip
PREFERRED = gets treated BETTER (preferred) over common stock.
Why It Matters
Preferred stock matters because it offers a middle ground between bonds and common stock, providing more stable income through fixed dividends while potentially offering better returns than bonds. Understanding preferred stock helps investors build a diversified portfolio that matches their risk tolerance and income needs.
Common Misconception
Many people mistakenly believe that preferred stock is safer than common stock in all situations. While preferred stockholders do have priority during liquidation, preferred stock can still lose significant value if the company faces financial trouble, and the fixed dividend can become unattractive if interest rates rise.
In Practice
A company might issue preferred stock with a 5 percent annual dividend on a 100 dollar share price, meaning investors receive 5 dollars per year. If the company goes bankrupt, preferred shareholders get paid from remaining assets before common stockholders, but they typically cannot vote on company decisions like the election of the board of directors.
Etymology
From Latin 'praeferre' (to prefer, to put before) — these shares are PREFERRED over common shares.
Common Misspellings
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See Also
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