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.
