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in a publicly-traded company
without voting rights
, but otherwise with more rights than common shares
. Preferred stocks receive dividends
before common shares and sometimes have guaranteed dividends, while common shares only receive the leftovers. Preferred stocks also have a prior claim on capital
in the event of liquidation
; if the company is liquidated, all preferred shareholders must be paid off before a single common shareholder. Some preferred stocks are convertible
, which means they can be changed into common shares at a certain ratio so that even preferred shareholders without voting rights have the possibility of gaining them. Preferred stocks tend not to appreciate
as fast as common stocks.
A security that shows ownership in a corporation and that gives the holder a claim prior to the claim of common stockholders on earnings and also generally on assets in the event of liquidation. Most preferred stock issues pay a fixed dividend set at the time of issuance, stated in a dollar amount or as a percentage of par value. Because no maturity date is stipulated, these securities are priced on dividend yield and trade much like long-term corporate bonds. As a general rule, preferred stock has limited appeal for individual investors. See also auction-rate preferred stock
, callable preferred stock
, floating-rate preferred stock
, Monthly Income Preferred Securities
, new money preferred
, preferred dividend coverage
, prior preferred
, remarketed preferred stock
, second preferred
Some corporations issue preferred as well as common stock.
Preferred stock can be an attractive investment because it typically pays a fixed dividend on a regular schedule. The share prices also tend to be less volatile than the prices of common stock.
In fact, preferred stock prices tend to move with changing interest rates in the same way that bond prices do. That's one reason this type of stock is sometimes described as a hybrid investment because it shares some characteristics with common stock and some with fixed-income securities.
What preferred stock doesn't generally offer is the right to vote on corporate matters or the opportunity to share in the corporation's potential for increased profits in the form of increased share prices and dividend payments.
Convertible preferred shares can be exchanged for a specific number of common shares of the issuing company at an agreed-upon price. The process is similar to the way that a convertible bond can be exchanged for common stock.