Preferred Stock

Definition

The financial accounting term preferred stock refers to a class of equities issued by corporations that contains special preferences, or features, that are not present in common stock.  Preferred stock dividends are typically paid before those of common stocks; however, they usually don't have the voting rights common shareholders enjoy.

Explanation

Preferred stocks are often described as a hybrid between common stocks and bonds.  The value of preferred stock issued by a company can be found in the owner's equity section of the company's balance sheet.

Generally, preferred stock exhibits one or more of the following features or characteristics:

  • Claim to Assets:  stockholders are paid after bondholders, but before common stockholders in the event of liquidation.
  • Par Value:  preferred shares are typically assigned a dollar value, which is the amount that would be paid to shareholders in the event of liquidation.
  • Nonvoting Convertible Preferred:  stockholders are not allowed to participate in the voting process normally offered to holders of common stock.
  • Convertible Preferred Stock:  shares of the preferred stock may be convertible to common stock at a pre-determined ratio.
  • Fixed Dividends:  preferred stock is generally paid dividends before common stockholders.
  • Callable Preferred Stock: preferred stock can often be retrieved by the company at a pre-determined price and usually after a fixed amount of time has elapsed.

Related Terms

balance sheet, owner's equity, par value, additional paid-in capital, Class A and Class B stockcumulative preferred stock, participating preferred stock, callable preferred stock, convertible preferred stock