What is preferred stock?

Preferred stock is a type of capital stock issued by some corporations. Preferred stock is also known as preference stock.

The word "preferred" refers to the dividends paid by the corporation. Each year, the holders of the preferred stock are to receive their dividends before the common stockholders are to receive any dividend. In exchange for this preferential treatment for dividends, the preferred stockholders (or shareholders) generally will never receive more than the stated dividend. For example, the holder of 100 shares of a corporation's 8% $100 par preferred stock will receive annual dividends of $800 (8% X $100 = $8 per share X 100 shares) before the common stockholders are allowed to receive any cash dividends for the year. Unless the preferred stock has a participating feature, this preferred stockholder will never receive more than $8 per share no matter how successful the corporation becomes.

The features of preferred stocks can vary. Examples include cumulative, convertible, callable, participating, and more.

Since the dividend on preferred stock is usually a fixed amount forever, once the preferred stock is issued its market value is likely to move in the opposite direction of inflation. The higher the rate of inflation, the less valuable is the fixed dividend amount. If the inflation rate declines, the value of the preferred stock is likely to increase, but no higher than the stock's call price.

Most corporations do not issue preferred stock. Typically, corporations will issue only common stock and use debt.