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Preferred Stock

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Like common stock, preferred stock represents ownership in a corporation. As the name implies, it receives preferential treatment over the common stock with respect to dividend payments and their claim to the firm's assets in the event of a bankruptcy. Preferred stockholders are entitled to the issue price of their stock plus the dividends they are owed. This is, of course, after the bondholders have been paid.
Preferred Stock Dividends

A preferred stock's dividend is a payment made by the firm at regular intervals, similar to the interest payments on a bond. Most preferred stock is nonparticipating and cumulative. Preferred stock is nonparticipating in the sense that the preferred dividend remains constant regardless of any increase in the firm's earnings.

Firms can decide, however, not to pay the dividends on preferred stock right away. They will be paid in a later period, and are called dividends in arrears. The cumulative feature of preferred stock means that the company always owes these dividends to the preferred stockholders, and they accumulate over time. The firm must pay preferred dividends in arrears before a dividend on its common stock can be paid.

Some preferred stock is issued with adjustable dividends. Adjustable-rate preferred stock became popular in the early 1980s when interest rates were rapidly changing. The dividends of adjustable-rate preferred stocks adjust periodically to changing market interest rates.
Voting Rights of Preferred Stockholders

Preferred stockholders do not have voting rights. Exceptions to this rule can occur when the corporation is in arrears on its preferred dividend payments, but this is rare.
Convertible Securities

Convertible preferred stock can be converted to common stock at a predetermined ratio (such as two shares of common stock for each share of preferred stock). If the common stock rises in price, the holder can choose to convert the preferred shares into common shares. After conversion, preferred dividend payments are no longer received.

Convertible bonds are bonds that can be exchanged for shares of common stock. Before conversion it is corporate debt, thus the bond interest and principal payments are contractual obligations of the corporation. Most convertible bonds are subordinated debentures, meaning that they get paid after other bonds are paid, so investors who own convertible bonds have lower ranking claim against corporate profits than most other debt holders.