Know the Types and How Preferred Stocks Work

Know the Types and How Preferred Stocks Work

What is a preferred stock?

Generally, there are two types of stocks: common and preferred stocks. Preferred stock is less risky than common stock but riskier than bonds. Preferred stocks are also known as preference shares. They give priority to their shareholders when it comes to dividend payments and asset distribution. Thus, preferred stockholders have a higher claim on assets and earnings than common stockholders. If the company goes bankrupt, the preferred stockholders are paid first before common stockholders. However, preferred shareholders have no voting rights in company elections.

What are the main types of preferred stocks?

There are four significant types of preferred stocks:

Cumulative preferred stockholders have a right to require the company to pay dividends omitted in the last periods. The company must pay dividends to preferred stockholders before paying any dividends to common stockholders.

Non-cumulative preferred stockholders can not claim any unpaid dividends to be paid later. For this reason, cumulative preferred shares are usually more expensive than non-cumulative ones.

Participating in preferred stock allows additional dividends if the company reaches the targeted performance result. If the company can not meet the predetermined profit target, holders of participating preferred stock have to agree to receive a regular dividend rate, not more.

The convertible preferred stock allows holders to convert their preferred shares to standard at a determined price.

How to buy preferred stocks?

You can find preferred on different stock exchanges similar to common stocks. However, most companies do not issue preferred stock, so the number of this kind of stock is much smaller than common stock. Moreover, not all businesses issue preferred stocks, but only banks, real estate investment trusts, and insurance companies have more of these stocks.

It is common to find several different offerings of preferred shares from the same issuer with different yields. You can buy preferred stock in any brokerage firm, but investors should know that their tickers will vary from common stock.

Before trading preferred stock, you can review the credit rating from S&P for each offering and check out other features, such as yields, convertibility, and scalability.

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