Types
of Preferred Shares Types
of Preferred Shares 
A good starting place for considering preferred shares is to look at the term or maturity provided for in their structure. Usually the name of a preferred share gives away its term nature:
Preferred shares provide for their payment terms when they are issued. Once again, the name of the preferred usually gives away its payment provision:
Preferred shares rank in seniority after all debt of a company but before the common shareholders. This means that in bankruptcy that the preferred shareholders would get anything left over after the debt holders have been repaid and before the common shareholders. In a normal situation, it also means that the preferred shareholders have priority in receiving dividends. Preferred share terms usually specify that no common share dividends can be paid if preferred share dividends are not paid as required. This sounds good, but in normal situations the preferred shareholders have much more limited leverage than the debtholders. If an interest payment is missed, the debtholders can force the company into default. If a company cannot make a preferred dividend, its board can always decide not to pay it. In fact, most bond covenants provide for no dividend payments, distributions or redemption of preferred shares if these would result in default under the terms of the bond indentures. Usually, the most severe sanction provided for in preferred share structures is the right for preferred shareholders to appoint a representative (s) to the board of a company if a preferred dividend is missed.
Most preferred shares are "cumulative" which means that skipped dividend payments are accumulated until they are finally paid. For example, a company that missed two years worth of preferred share dividends would have to pay all the missed payments before it paid out anything to the common shareholders. Recently, there have been attempts by companies to make distributions to common shareholders even though the preferred shares were in arrears. This is tempting for companies, as the preferred shareholders do not have votes and thus a voice in the corporate governance. These attempts resulted in legal actions and some sort of settlement with the preferred shareholders.
"Non-cumulative" preferred shares do not accumulate dividends that are in arrears. In the last six years, financial institutions have been issuing preferred shares as subordinate capital to meet the international capital standards. The reason for this is that bank regulators want capital that ranks after the banks' deposits and gives them some flexibility in financial difficulties. Non-cumulative preferred shares meet this test as they can have their dividends suspended without penalty. The only provision on these shares is usually that common dividends cannot be paid if the preferred dividends are not being paid.
The various features for preferred shares make for a number of "permutations and combinations" as math teachers are fond of saying. This leads to a preferred share vocabulary or "lingo" in a world all of its own. A (non-exhaustive) listing and explanations of the various types is given below:
Confused? You should be. Preferred shares are way beyond the average investor's bailiwick and there is a steep learning curve for those who want to develop this expertise. A good "Dividend" mutual fund solves the expertise problem but watch out for common stock wolves in preferred sheeps' clothing. Many dividend funds are heavily invested in common stock with very low dividend yields. While preferred shares have high coupons/dividends which insulate against market setbacks, common stocks have much lower dividend payouts which expose the holder to a much higher level of capital risk.
Preferred
Shares
The
Equity Page
The Financial Pipeline Homepage