2017-03-01 00:00:00 Equity English Learn what preferred shares of stock are and discover the many characteristics that make them different from common stock. https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/06/08214209/Accountant-Explaining-Preferred-Shares-Client.jpg What Are Preferred Shares?

What Are Preferred Shares?

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Preferred shares, also called preferred stock or preference shares, are a class of stock shares in a corporation that are higher-ranking in the capital structure than common stock. Owners of preferred shares have a higher claim on the company’s earnings and assets. It’s important to keep in mind that preferred shares are lower-ranking in the capital structure than bonds. Preferred shares let a corporation raise capital without any dilution of control through accumulated voting rights. Typically, preferred stock has the following characteristics that common stock does not have:

  • Preference in dividends (meaning that dividends get paid to owners of preferred shares first)
  • Preference in assets (if the company liquidates)
  • An option to convert to common stock (while common stock doesn’t have the option to convert to preferred stock)
  • The ability to be called (that is, redeemed early) by the company
  • Non-voting shares

Due to negotiations, bulk purchases, and tax advantages, institutions are normally the initial buyers of preferred shares, not individual stock owners. Preferred shares come in a variety of types, each with their own unique characteristics. Types of preferred shares include, but are not limited to: prior preferred, preference preferred, cumulative preferred, exchangeable preferred, participating preferred, perpetual preferred, putable preferred, non-cumulative, and supervoting.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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