What Is Meant by a Preferred Stock?


Quick Answer

Preferred stocks are stock instruments carrying a dividend yield that can either be fixed or floating and are not tax deductible, states CBS MoneyWatch for CBS News. Preferred stocks either have no maturity date or, more commonly, have maturity dates between 30 and 50 years.

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Full Answer

Preferred stocks are purchased by shareholders because they are less volatile than common stocks and often pay a higher dividend, explains About.com. In the event the issuing company of the stock declares bankruptcy, preferred stocks rate higher in the capital structure than common stocks but below bonds. This means when a company goes out of business, the owner of preferred stocks receives financial compensation and/or dividend payments before shareholders of common stocks but after bondholders.

To further complicate matters, investors in preferred stocks must choose between adjustable and fixed rates, convertible and nonconvertible features, cumulative versus noncumulative and participating versus nonparticipating, notes About.com. Owners of preferred shares have no voting rights, and the shares themselves typically appreciate at a slower rate than common stocks.

Preferred stocks have a call feature, meaning at any time the issuing company can require the shareholder to sell the stock at a specific price dictated by the issuer and the market, according to CBS MoneyWatch. This call provision creates a poor risk/reward scenario for the preferred shareholder.

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