The Different Types of Preferred Stock

Preferred stocks, also known as preferred shares, are equity securities that get preferential treatment over common shares. These shares can be considered hybrid securities because they also show characteristics similar to bonds. Holders of preferred stocks are given priority guarantee. They are given preferential treatment when it comes to the payment of dividends and with other claims on company assets. A holder of this type of share does not have voting rights. Here are the main types of preferred stocks.

Cumulative Stocks

This type of preferred stock comes with a provision stipulating that if dividends have been skipped or omitted in the past, the holder will receive accumulated dividends in arrears. Furthermore, preferred stockholders will also receive dividend payouts before common shareholders. A cumulative preferred share can also be classified further by priority or preference, which will indicate its seniority over other preferred stocks and common shares during dividend payouts.

Non-Cumulative Stocks

All preferred shares that are not cumulative are called non-cumulative, or straight. In essence, holders of straight preferred stocks cannot expect to receive any payout for missed or omitted dividends.

Callable or Redeemable

As the name implies, this kind of preferred stock comes with a provision that gives the issuing company the right to call or redeem the share at a certain price, which will usually be higher than market value. Callable preferred stocks are not very popular with investors because of the risks that they carry. If prevailing interest rates are significantly lower due to financial conditions, calling such shares can lead to a lot of savings for the issuer, but huge losses for the investors.

Convertible Preferred Shares

This type of preferred stock can be exchanged or converted to a predetermined number of the issuer’s common shares after a specified date or period. After the set time, investors can decide when they want to make the conversion. However, convertible preferred stocks come with a provision allowing the issuer to force conversion. It is important to note that after the investors convert their preferred stock to common stock, the change is irreversible and an investor does not have an option to convert the common shares back to preferred shares.

Participatory Stocks

Participatory stocks provide holders with the opportunity to receive additional dividend payouts if the company or the issuer beats predetermined financial objectives, such as sales, earnings or profitability goals. Investors of participating preferred stocks will receive regular dividends, regardless of how well the company performs, as long it has enough assets to make the dividend payments. It must be noted that most preferred stocks are non-participatory.

Adjustable Rate Stocks

The dividend values for adjustable-rate preferred shares, more popularly known as the ARPS, are flexible. They are based on a set formula that is designed to move with present interest rates. The most common benchmark used by companies to compute dividend values for ARPS is the T-bill rate.

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