As an investor interested in stocks, you’ll likely come across the term “preferred stock.” Preferred shares of stock are those that have a higher claim on a corporation’s assets and earnings than common shares of stock. Investors with preferred stocks have a class of ownership in the chosen corporation, like shareholders of common stocks. However, stockholders with preferred stocks take priority over common stockholders when it comes to dividends. Common and preferred stocks also bestow different rights upon owners.
Common vs. Preferred Stock
Common stocks give partial ownership of the company to the holder. Having a common share also gives you certain voting rights within the company, such as one vote per share to elect the board of directors. Common shareholders are last in line to receive a company’s assets. This means that if a company declares bankruptcy, common stockholders will receive only what assets remain after passing through the hands of creditors, those with bonds with the company, and preferred shareholders.
Preferred stock, like common stock, grants partial ownership of a company to the shareholder. However, preferred stockholders don’t have the same voting rights as common stockholders. The dividends that preferred stockholders pay don’t generally fluctuate like they do with common stocks. If the company lacks the ability to pay the dividend, it’s exempt. The biggest benefit of choosing preferred stock over common is having a greater claim on a company’s assets. Instead of being last in line to receive assets, preferred shareholders receive their dividends first.
Types of Preferred Stocks
As with many investments, there are several different types of preferred stocks in which a shareholder can invest. A licensed broker will be able to inform you about each type in more detail, specific to your portfolio. There are four main types of preferred stock:
- Convertible Shares -Shareholders can convert these preferred shares into a specified number of common stock shares.
- Participating Preferred Stock -These preferred shares can receive higher-than-average dividend payments if the company enjoys a larger-than-expected profit.
- Cumulative Preferred Stock – These shares give owners the right to accumulate skipped dividend payments, making the company pay shareholders first if they resume paying dividends.
- Non-Cumulative Preferred Stock. Holders of non-cumulative preferred shares won’t receive payments for skipped dividends.
The price of preferred shares generally fluctuates less than common shares since they have fixed dividend payments. However, preferred stock investors are definitely not immune from losses. Investors who typically have preferred shares in a company are institutions and they enjoy certain tax advantages. Institutions often buy preferred shares in bulk, raising large amounts of capital.
Protect Yourself from Investment Fraud
It’s a broker’s job to give potential investors all the facts about a company before recommending an investment. If a broker fails in this duty, omitting information or misrepresenting facts – and you lose money because of it – filing an arbitration claim with FINRA is the only course for restitution. Discuss the arbitration process with a skilled attorney before filing your claim.
Protect yourself from these harms by researching the broker and firm you work with and getting all the important facts about a company before becoming a shareholder. At Erez Law, we handle many types of complex preferred stock cases. Whether a broker misled you about the safety of the investment or failed to inform you of the risks of an investment, our attorneys will pursue every option available to you.
Our comprehensive knowledge of securities law means we have the ability to navigate even the most difficult cases. Call the team at Erez Law at 888-840-1571 today to speak with us about your losses.