Preferred Stock
Fundamentally, preferred stock is the same as common stock because like common stock, it
represents ownership in a company. And with that comes the right to lay claim on the company’s assets and
earnings. But outside of that things are very different.
First, unlike common stock as a holder of preferred stock you get no voting rights. In rare circumstances
you might have the ability to vote in certain matters, but generally you can't vote. So even though you are
considered a partial owner of the company, you don't really have an opportunity to let your voice be heard in
matters that affect the company.
Preferred shares also differs from common shares in the way you make money. Issues of preferred stock will
pay a fixed dividend that usually will not fluctuate (although some may fluctuate based on interest rates).
Also, the price for preferred shares has little opportunity to increase in value, so capital appreciation
is not very likely. On the upside, however, you would not expect a huge decline in price if the company performed
poorly. You can think of preferred stock as somewhat of a hybrid between common shares and bonds.
As a side note, when companies pay out dividends, the company follows a hierarchy in terms of who gets the
dividends first. And preferred stock shareholders always get paid before common shareholders. Hence
another reason that common shareholders are not guaranteed a dividend. Furthermore, if the company were to
go belly-up it must distribute its assets and pay off is creditors. In this case, preferred stockholders get
dibs on company assets before common stockholders do.
