XACC/291 - PRINCIPLES OF ACCOUNTING II
Instructor: RICHARD CARMODY

Jody Choate

12/15/12

Preferred Stocks meaning

A corporation can issue two types of stock: common and preferred. Common stock is partial ownership in a company and these are the shares usually referred to when discussing a company's stock. Preferred stock pays higher dividends and offers investors different opportunities for income investing. Investors should look at common and preferred stocks in very different ways.

Companies issue preferred shares as a way to raise capital instead of borrowing money by issuing bonds. Most preferred shares are issued with a fixed dividend rate that the company must pay before paying any dividend to common shareholders. The majority of preferred stock issues do not have an expiration date, so the issuing company is not required to pay back the money raised as it would if it issued bonds.

Preferred shares can be issued with different features that make them more attractive to investors. Cumulative preferred shares are entitled to make up any missed dividend payments before dividends are paid on common shares. Adjustable preferred shares have their dividends changed in line with some market interest rate. This protects shareholders in a rising rate environment. Convertible preferred shares could be exchanged for common shares at a pre-determined ratio

Investors buy preferred shares primarily an income investment to receive the regular dividends. Although preferred have preference over common stock to receive dividends, preferred shareholders are behind bondholders to be paid. The value of preferred shares can be affected by both the financial condition of the issuing company and the current interest rate environment. Unlike bond holders, preferred share owners usually do not have the security of a maturity date when the face value of the investment