Financial Term Explorer
Preferred Stock
A hybrid security that pays fixed dividends like a bond but trades like a stock. Preferred shareholders get paid before common stockholders.
đź“ť Definition
**Preferred Stock** is a class of ownership with higher claim on assets and earnings than common stock. Preferred shares typically pay fixed dividends and get priority in bankruptcy. However, they usually don't have voting rights and have limited upside potential.
In Simple Terms
Think of preferred stock as the VIP section between bondholders (first class) and common stockholders (economy). You get steady, predictable dividends (often 5-7%) and get paid before common shareholders. But if the company grows explosively, you don't share in that upside.
Example
Bank of America Series L preferred pays 6.625% annually regardless of common stock performance. You get reliable income, but if BAC stock doubles, your preferred shares might only gain 10-20%.
đź’ˇ Practical Tips
- 1Preferreds are interest-rate sensitive—prices fall when rates rise.
- 2Cumulative preferreds must pay missed dividends before common dividends resume.
- 3Consider preferred ETFs like PFF for diversification.
⚠️ Common Mistakes
Treating preferreds like common stocks. They behave more like bonds and react strongly to interest rate changes.
âť“ Frequently Asked Questions
Are preferreds safer than common stock?â–Ľ
In bankruptcy, yes. But their prices can be just as volatile, especially with interest rate changes.
Can preferred dividends be cut?â–Ľ
Yes, although it's rare and damaging to company reputation. Cumulative preferreds still owe back payments.