2.11:
Preferred Stock
Preferred stock is a type of equity ownership in a company offering investors fixed dividends with no voting rights.
For example, when investors purchase preferred stock in Salt Corporation, they are given ownership of the company's assets with no voting rights.
The dividends paid to the preferred stockholders are fixed, making them similar to fixed-income securities.
When Salt Corporation generates profits, the dividends are distributed to preferred stockholders before dividends are paid to common stockholders.
In the event of bankruptcy, payments on the company's assets are given to debtholders, followed by preferred stockholders over common stockholders.
Some preferred stocks come with callable features, allowing the company to repurchase shares at a predetermined price after a specified period.
This feature allows companies to modify capital based on their needs and market conditions.
However, preferred stock does not benefit from substantial capital growth, as the price of preferred stock is typically more stable.
Preferred stock generally attracts investors seeking fixed income from dividends with limited growth and no voting rights.
2.11 Preferred Stock
Preferred stock is a unique form of company ownership that incorporates elements of both stocks and bonds. Preferred stockholders may be paid regular, fixed dividends, similar to interest payments on bonds. Unlike common stockholders, preferred stockholders typically lack voting rights in the company. Preferred stock is known for its stability. The price of preferred shares exhibits less fluctuation than common stock, rendering it a safer investment for those seeking steady income rather than high growth. This stability is the reason many conservative investors favor preferred stock.
A unique feature of preferred stock is its priority during financial distress. In bankruptcy, preferred stockholders are prioritized for payment before common stockholders but after bondholders. This priority reduces the risk associated with preferred stock compared to common stock. Another feature may include the callable option, enabling companies to repurchase preferred shares at a predetermined price. This option allows companies to manage their financial structure effectively according to market conditions.
Overall, preferred stock attracts investors seeking consistent dividends and lower risk, despite not offering significant price appreciation or voting rights.