Preferred shares are stock in a company which have a defined dividend, and
a prior claim on income to the common stock holder.
Should the company wind up operations, preferred shareholders are paid any
obligations owed to them. Should a dividend be suspended by the Board of
Directors, for what ever reason, the preferred share usually has a cumulative
clause in it allowing that any unpaid dividends must be paid fully before any
dividends may be declared and paid to holders of common stock. This means that
the preferred share is a relatively more secure investment. The corporate
issuing preferred shares may add differing features to the share in order to
make it more attractive. These features are similar to those used in the fixed
income market and include convertibility into common shares, call provisions,
etc. Many have equated preferred shares with a form of fixed
income security due to its defined dividend stream.
However, with the added security offered by the guaranteed dividend stream,
the holder of preferred shares gives up the right to vote on issues related to
corporate governance. Therefore, the preferred holder has little input into
corporate policy. |