what is preferred stock 
the term stock refers to ownership or equity in a firm there are two types of equity common stock and preferred stock preferred stockholders have a higher claim to dividends or asset distribution than common stockholders the details of each preferred stock depend on the issue jiaqi zhou investopediaunderstanding preferred stockpreferred shareholders have priority over common stockholders when it comes to dividends which generally yield more than common stock and can be paid monthly or quarterly 1 these dividends can be fixed or set in terms of a benchmark interest rate like the london interbank offered rate libor and are often quoted as a percentage in the issuing description adjustable rate shares specify certain factors that influence the dividend yield and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company s profits the decision to pay the dividend is at the discretion of a company s board of directors unlike common stockholders preferred stockholders have limited rights which usually does not include voting 1 preferred stock combines features of debt in that it pays fixed dividends and equity in that it has the potential to appreciate in price this appeals to investors seeking stability in potential future cash flows types of preferred stockall of the types of preferred stock are exactly that preferred stock however not all preferred stocks are the same each may or may not have different features that make them more or less favorable compared to other types prior preferred stockprior preferred stock refers to the order in which preferred stock is ranked when considered for prioritization for creditors or dividend awards though regular preferred stock and prior preferred stock both hold precedence over common stock prior preferred stock refers to an earlier issuance of preferred stock that takes priority for example if a company can only financially afford to pay one tier of shares its dividend it must start with its prior preferred stock issuance preference preferred stockpreference preferred stock is considered the next tier of stock in terms of prioritization though it falls behind prior preferred stock preference preferred stock often has greater priority compared to other issuances of preferred stock if there are multiple tiers of preference preferred stock each issuance is usually given its rank i e most senior second senior etc perpetual preferred stocksome types of preferred stock have a fixed end date in which much like a bond the original capital contributed is returned to shareholders in most cases preferred stock is considered perpetual this means that the initial capital invested will not be returned an investor must sell their shares at their choosing to redeem the shares convertible preferred stockin most cases convertible preferred stock allows a shareholder to trade their preferred stock for common stock shares the exchange may happen when the investor wants regardless of the price of either share once the exchange has occurred the investor has relinquished its right to trade and cannot convert the common shares back to preferred shares convertible preferred stock usually has predefined guidance on how many shares of common stock it can be exchanged for cumulative preferred stockif a company issues a dividend it may issue cumulative preferred stock this means that should a company issue a dividend but not actually pay it out that unpaid dividend is accumulated and must be made in a future period it is also important to note that preferred stock takes precedence over common stock for receiving dividend payments this means that a share of cumulative preferred stock must have all accumulated dividends from all prior years paid before any other lower tier share can receive dividend payments noncumulative preferred stockit s worth pointing out that some preferred stock may explicitly state that it is noncumulative this means that if a company does not pay a dividend in a given year that missed dividend is not directly made up for in a future period dividends are treated as year to year any prior period does not carry over and does not hold weight into the order of who gets paid what this type of stock is common in banking as there are international rules that dictate how certain capital is classified by regulators participating preferred stockin some years a company may decide it cannot financially afford to issue a dividend however participating preferred stockholders may still be entitled to a dividend these participating dividends may be tied to company achievements such as total sales earnings or specific margins a participating preferred stockholder may also earn these types of dividends on top of what the company issues as normal dividends assuming the company has enough finances to make all payments preferred stock vs common stockequity ownership of a companytradable on public exchanges for public companies 