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.