Preferred Stock

May 05, 2021

A type of security sharing the properties of stocks and bonds—a hybrid of a bond and a share of common stock. The holder of a share of preferred stock is normally paid a fixed dividend which receives first priority (i.e., holders of common stock do not receive their dividends until holders of preferred stock have been paid their dividends in full). In the event of a bankruptcy, holders of preferred stock have priority claim to the company’s assets over holders of common stock, though the preferred stockholder’s claim is still subordinate to that of the bondholders. Generally, preferred stock shareholders do not have voting rights.

In exchange for higher income and perceived safety, holders of preferred stock forgo the possibility of larger future gains. Though capital gains opportunities for preferred stockholders can occur during periods of declining interest rates and improved credit conditions, the primary incentive to invest in preferred stock comes from the periodic income distributions. Additionally, the Jobs and Growth Act of 2003 reduced the tax on dividends paid to individuals for some select preferred securities. To identify the tax status of a preferred issue, refer to the Taxation section of its prospectus. The terms of preferred stock issues can vary widely, even among the same corporation.