Series 24: 5.1.2. Preferred Stock

5.1.2.  Preferred Stock

Some companies also issue preferred stock. Holders of preferred stock are given preference over common stockholders if the company decides to pay out dividends. Unlike common stock dividends, which may increase if the issuer’s profit rises, preferred dividends are fixed. In addition, the price of preferred stock doesn’t move as much as that of common stock. This means that while preferred stock doesn’t lose much value even during a downturn in the stock market, it doesn’t increase much either, even if the price of the common stock soars. One other distinction between common stock and preferred stock has to do with what happens if the issuer is forced to liquidate. In that event, the company has an order of priority that it must follow, and obligations to preferred stockholders must be met before those to common stockholders.

Preferred securities are generally more suitable for investors who have a long-term plan for their investments and are more interested in a fixed rate of return