What is redeemable preferred stock?


Quick Answer

Redeemable preferred stock is a type of preferred stock that a company issues which can be bought back from the stockholder after a specified date, according to Investopedia. The redemption date and redemption value of the stock is set at the time of the stock's issuance.

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Full Answer

According to Investopedia, a redeemable preferred stock can be a risky investment for the stockholder. A company is most likely to redeem a stock issue if the company feels it can issue a replacement redeemable preferred stock share at a lower dividend rate. This forces stockholders to choose between reinvesting in the company at the lower rate and receiving lowered dividend payments in the process, or investing elsewhere.

To account for the possible risk of redemption, many redeemable preferred stock issues offer a call premium, as Investopedia explains. This call premium is a cash amount above the par value of the stock that is paid upon redemption. Like the redemption date and price, the call premium is set at the time of stock issuance. Redeemable preferred stock is also widely known as callable premium stock. None of the redemption details may be changed after the issuance, and redeemable preferred stock is always paid off prior to common stock in the case of bankruptcy.

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