Preferred Stock is a type of equity security offered by companies that ranks above common stock in terms of claims over the company assets and earnings. Holders of preferred stock usually receive a fixed dividend that is paid out before any dividends are distributed to common stockholders. Preferred stock often has specific features, such as the possibility of it being callable by the company or it being convertible into common stock at a set ratio. It provides more predictable income than common stock but usually does not carry voting rights, limiting shareholders' influence over corporate decisions.
For example, a company may issue preferred stock promising a fixed dividend of 5% annual yield against the stock's par value of $100. This means that preferred shareholders can anticipate receiving $5 per year per share, provided the company has sufficient profits to distribute dividends.
Preferred stock is an attractive investment for those seeking fixed income combined with an equity position in a company. It aligns with the need for income stability while retaining residual growth potential. Key related terms include Equity, Dividends, and Cumulative Preferred Stock.