• May 2019
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Preferred Stock

A class of corporate ownership that offers its holders higher priority over holders of common stock on claims related to earnings and assets (e.g., dividends must be paid to preferred shareholders prior to common shareholders).

Common stock is generally more volatile than preferred stock. As a result, common stock may ultimately be more profitable under certain circumstances, but preferred stock is more stable. In addition, because preferred stockholders are given greater priority when it comes to dividend payments, they tend to benefit from stock-related income in more consistent ways. Similarly, preferred shareholders have a priority claim on assets in the event of liquidation when compared to common shareholders.

As preferred stockholders receive preferential financial treatment in these ways, their shareholder rights tend to be more limited than those of common stockholders. For example, common shareholders are usually entitled to voting rights on certain issues, whereas preferred shareholders are not generally granted voting rights.

 

EXAMPLE:

Dad: “Woo hoo! Ice cream for everybody!”

Son: “Why is he in such a good mood?”

Mom: “He just received a dividend payment from some preferred stock we invested in. And the Green Bay Packers won in overtime last night against the Minnesota Vikings… take your pick.”