Preferred stock definition
/What is Preferred Stock?
Preferred stock is a class of equity ownership that has a more senior claim on the earnings and assets of a business than common stock. In the event of liquidation, the holders of preferred stock must be paid off before common stockholders, but after secured debt holders. Preferred stock also pays a dividend; this payment is usually cumulative, so any delayed prior payments must also be paid before distributions can be made to the holders of common stock.
Preferred stock holders can have a broad range of voting rights, ranging from none to having control over the eventual disposition of the entity. Preferred stock may be sold when a company is unable to sell common shares at a reasonable price. In general, preferred stock has features of both debt and equity, since it may have a fixed dividend amount associated with it (as is the case with debt) and can appreciate in value (as is the case with equity).
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Disadvantages of Preferred Stock
There are several disadvantages associated with preferred stock, which are as follows:
Liquidity. There is generally a broader market for common stock, making it easier to sell these shares than preferred stock. This means that you might have to wait longer to find a buyer for your preferred stock, or might be required to sell it at a discount.
Reduced privileges. The holders of preferred stock generally do not have the voting privileges held by common shareholders, so they cannot elect company directors or vote on other matters that may be of significance to the ongoing success of a business.
Terms Similar to Preferred Stock
Preferred stock is also known as preference shares.