What is Preferred Stock? Features and Types

preferred stock

What is Preferred Stock?

Preferred stock pays a fixed dividend much like interest payment on bonds and have prior right over that of ordinary share dividends.

Stock Certificate is the evidence of ownership in a corporation. This stock may be common or preference. Each corporation in its charter to issue a maximum number of shares of each class of stock. Each share certificate shows how many shares of ownership it represents.

In preference share, the dividend is not a liability until directors declares the dividend. Moreover, it is not a tax – deductible expense to the corporation.

These stocks have preference or priority over common as to the receipt of dividends, distribution of assets in the event of liquidation, or other specified matters.

Features of Preferred Stock

  • These types of stocks get preference over equity share at the time of receiving dividends or claim over the assets at the time of liquidation.
  • They do not hold any voting right in the management of the company.
  • Preference share holders have claim over certain percentage of dividend and the capital invested.
  • Just like debts, these stock also have fixed maturity period. On maturity, the preference share capital is refund to the preferred stock holders.

Types of Preferred Stock

Cumulative stock – In these stocks, if corporation is unable to pay the dividend, the unpaid dividends accumulate and must be paid before the firm can resume payment of common stock dividends.

Non – Cumulative Stock – These stock does not pay stockholder any unpaid or omitted dividends.

Convertible and Non – convertible – Preference shares that are convertible into equity share are convertible whereas which are not convertible are non convertible stock.

Redeemable and Non redeemable shares – shares which gets redeem after certain period of time are redeemable. On the other hand stocks that gets redeemable at the time of liquidation  are non redeemable preference stock.

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