Preferred stock is a type of stock issued by companies. This investment has stock-like and bond-like characteristics.
What is preferred stock?
- Preferred stock is an investment with stock-like and bond-like characteristics.
- Preferred stockholders receive regular dividend payments like coupon payments for bondholders.
- Preferred stock doesn’t generate returns from stock price appreciation, unlike common stock.
The benefit of preferred stock is its dividend priority. Preferred stockholders are the first to receive dividends, which isn’t always guaranteed to common stockholders (most stock investors). Preferred stock can be converted to common stock (but not vice versa). Another benefit is that this income source is distributed on a regular basis, similar to coupon payments from bonds.
However, preferred stock has a few disadvantages. Unlike common stock, preferred stockholders don’t have voting rights, so they can’t vote on corporate actions or the election of a corporate board member. These investments also don’t generate returns if the stock’s price increases, unlike common stock. Preferred stockholders rank higher than common stockholders if the company liquidates, but they’re outranked by bondholders.