have a fixed term or maturity date
preferred stock is often compared to bonds because both may offer recurring cash distributions however as there are many differences between stocks and bonds there are differences with preferred equity as well in terms of similarities both securities are often issued at face value or par value this value is used to calculate future dividend payments and is unrelated to the market price of the security then companies may issue dividends similar to how bonds issue coupon payments though the mechanism is different the end result is ongoing payments derived from an investment there are still many differences between the two preferred stock dividend payments are not fixed and can change or be stopped however these payments are often taxed at a lower rate than bond interest in addition bonds often have a term that matures after a certain amount of time there is theoretically no end date to preferred stock in addition there are considerations to make regarding the order of rights should a company be liquidated in most cases debtholders receive preferential treatment and bondholders receive proceeds from liquidated assets then preferred shareholders receive distributions if any assets remain common stockholders are last in line and often receive minimal or no bankruptcy proceeds companies in distressif a company is struggling and has to suspend its dividend preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders 1 shares that have this arrangement are known as cumulative if a company has multiple simultaneous issues of preferred stock these may in turn be ranked in terms of priority the highest ranking is called prior followed by first preference second preference etc preferred shareholders have a prior claim on a company s assets if it is liquidated though they remain subordinate to bondholders preferred shares are equity but in many ways they are hybrid assets that lie between stock and bonds they offer more predictable income than common stock and are rated by the major credit rating agencies unlike bondholders failing to pay a dividend to preferred shareholders does not mean a company is in default because preferred shareholders do not enjoy the same guarantees as creditors the ratings on preferred shares are generally lower than the same issuer s bonds with the yields being accordingly higher 2cumulative preferred stock have the condition that any previously awarded dividends that have not yet been paid must be distributed before any common shareholder receives any dividend distribution this is in contrast to noncumulative preferred stock which does not accumulate prior unpaid dividends voting rights calling and convertibilitypreferred shares usually do not carry voting rights although under some agreements these rights may revert to shareholders who have not received their dividend 1preferred shares have less potential to appreciate in price than common stock and they usually trade within a few dollars of their issue price most commonly 25 whether they trade at a discount or premium to the issue price depends on the company s creditworthiness and the specifics of the issue for example whether the shares are cumulative their priority relative to other issues and whether they are callable 2if shares are callable the issuer can purchase them back at par value after a set date if interest rates fall for example and the dividend yield does not have to be as high to be attractive the company may call its shares and issue another series with a lower yield shares can continue to trade past their call date if the company does not exercise this option 2some preferred stock are convertible meaning they can be exchanged for a given number of common shares under certain circumstances 2 the board of directors might vote to convert the stock the investor might have the option to convert or the stock might have a specified date when it automatically converts whether this is advantageous to the investor depends on the market price of the common stock pay attention to whether a preferred stock is callable the issuing company holds the right to buy the security back typical buyers of preferred stockpreferred stock come in a wide variety of forms and are generally purchased through online stockbrokers by individual investors the features described above are only the more common examples and these are frequently combined in a number of ways a company can issue preferred shares under almost any set of terms assuming they don t fall afoul of laws or regulations most preferred issues have no maturity dates or have very distant ones 2institutions are usually the most common purchasers of preferred stock especially during the primary distribution phase this is due to certain tax advantages that are available to them but that are not available to individual investors 3 because these institutions buy in bulk preferred issues are a relatively simple way to raise large amounts of capital private or pre public companies issue preferred stock for this reason preferred stock issuers tend to group near the upper and lower limits of the creditworthiness spectrum some issue preferred shares because regulations prohibit them from taking on any more debt or because they risk being downgraded on the other hand several established names like general electric bank of america and georgia power issue preferred stock to finance projects 456