? asked in Business & FinanceCorporations · 8 years ago

What is Preferred Share exactly ?

Recently i was introduced to a new company which was offering Preferred share... i want to know about preferred share please help me with this thanks...

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  • 8 years ago
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    To the best of my knowledge, preferred stock has 2 advantages over regular stock. One is if the company goes out of business, preferred stock is one step higher than standard stock if there are assets remaining to be divided with the shareholders. Second, most preferred stocks have dividends where many standard stocks do not. If the company has standard dividends, the preferred shareholders usually get a higher dividend.

    Below is what I found useful on Wikipedia. Hope this helps!

    Features:

    Preferred stock is a special class of shares that may have any combination of features not possessed by common stock.

    The following features are usually associated with preferred stock:

    Preference in dividends.

    Preference in assets in the event of liquidation.

    Convertible into common stock.

    Callable at the option of the corporation.

    Nonvoting.

    In general, preferreds have preference to dividends payments. A preference does not assure the payment of dividends, but the company must pay the stated dividend rate prior to paying any dividends on common stock.

    Preferred stock can either be cumulative or noncumulative. A cumulative preferred requires that if a company fails to pay any dividend or any amount below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period, which can be quarterly, semi-annually, or annually. When a dividend is not paid in time, it has "passed" and all passed dividends on a cumulative stock is a dividend in arrears. A stock that doesn't have this feature is known as a noncumulative or straight preferred stock and any dividends passed are lost forever if not declared.

    Other features or rights

    Preferred stock may or may not have a fixed liquidation value, or par value, associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.

    Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.

    Almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred. Sometimes, dividends on preferred shares may be negotiated as floating i.e. may change according to a benchmark interest rate index such as LIBOR.

    Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time.

    The above list, although including several customary rights, is far from comprehensive. Preferred shares, like other legal arrangements, may specify nearly any right conceivable. Preferred shares in the U.S. normally carry a call provision, enabling the issuing corporation to repurchase the share at its (usually limited) discretion.

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