Preferred stock

Financial Dictionary -> Investing -> Preferred stock

Preferred stock is a unique type of stock which is offered by certain companies, in addition to common stock. Preferred stock has several features that set it aside from common stock, but these can also be of negative use. It all depends on your investment goals.

The preferred stock (like common stock) acts as a theoretical part ownership of the business, but unlike common stock preferred stock does not give the holder voting rights. It does however have the benefit of paying out dividend which doesn't fluctuate, and has benefits because regular dividends may end up significantly lower; investors know exactly what they're going to get with each dividend. Unfortunately like regular dividends companies do not have to make this payment if they are in financial trouble, so this perk alone shouldn't always sway you in to choosing preferred stock over common stock.

The most important benefit of having preferred stock is that shareholders get paid their dividends before common stock holders, meaning the investor will always be first when it comes time to get paid. Preferred shareholders are paid off prior to common shareholders in case a corporation goes bankrupt. Holding preferred stock basically gives you added security that you'll see your financial return.
Watch out though as many preferred stocks are callable, meaning if market interest rates decrease dramatically, the company can call in the shares. You do get paid your money back, but will have to reinvest at the new lower rates.

Preferred stock should be examined from a company to company basis, because the board of directors have ultimate control and if things are tight, the shares can be cancelled or called and if the company is likely to go against your views, you have no voting power to correct it.