Preferred Stock
Preferred stock, also known as Preferred shares, are shares of stock that carry additional rights above and beyond those conferred by common stock.
Such rights may include:
- a dividend amount that never changes, if the dividend is paid at all. The dividend is usually specified as a percentage of the initial investment and/or a stock symbol letter, such as Pacific Gas & Electric 6% Preferred A. Variable preferreds are rare exceptions: their changing dividends depend on prevailing interest rates, or nowadays on ratings.
- precedence over shares of common stock when it comes to the distribution of profits and the liquidation proceeds of a stock corporation
- superior voting rights generally, or 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, many preferred shares provide no voting rights
- anti-dilution provisions that prevent the issuance of additional shares at prices below those of the preferred shares
- right of first refusal with respect to the issuance of new shares
- dividend rights or cumulative dividend rights (cumulative dividend rights accumulate during periods when they are not paid).
- when a company goes bankrupt and has to liquidate assets the preferred stockholders get paid first, if possible.
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 are more common in private companies, where it is more useful to distinguish between the control of and the economic interest in the company. Also, government regulations and the rules of stock exchanges discourage the issuance of publicly traded preferred shares.
A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred", "Series B Preferred", "Series C Preferred" and common stock.
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