Preferred Stock

Preferred Stock is a special equity security that has properties of both equity and debt. It is generally considered a hybrid instrument. Preferred stock is senior to common stock, but is subordinate to bonds in terms of claim or rights to their share of the assets of the company. Preferred stock has priority over common stock in the payment of dividends and any payments received when a company liquidates. Preferred stock comes in many forms. It can be: Convertible or Non-Convertible Cumulative or Non-Cumulative Voting or Non-Voting Callable or Non-Callable Maturity Date or No Maturity Date A preferred stock without a maturity date is called a perpetual preferred stock. These are relatively rare. A good example of perpetual preferred stock is the many series of Public Storage (PSA) preferred shares that trade on the New York Stock Exchange. Before investing in preferred stock, it is important to know which of the above groups the stock belongs to. Is it convertible or non-convertible? Are dividends cumulative or non-cumulative? It is also critical that an investor knows what bonds the company has in front of the preferred stock. Bondholders get paid first. So the decision to buy a preferred stock can be similar to the decision to buy a bond. But, remember, the preferred stock of a company with bonds is junior to those bonds. Unless a preferred stock is convertible, the upside in a preferred stock investment is more limited than in a common stock investment. If a company doubles its earnings, it is usually under no more obligation to double the dividends paid to preferred shareholders than it is to double the interest paid to its bankers and bondholders.So preferred stock is very different from common stock.