What Are Preferred Shares?

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 whatever 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.

4 years ago