Preferred Stock

Definition - What does Preferred Stock mean?

Companies and corporations may sell stock to raise capital to expand their markets, pay off debts, increase their facilities, or to release new products. Stocks that are sold can include common stocks and preferred stocks.

Justipedia explains Preferred Stock

While common and preferred stockholders may both receive dividend payouts from the corporation, preferred stockholders will have additional benefits that give them greater claim to the earnings and assets of the company.

Specifically, preferred stock owners will generally receive their dividend payout prior to common stockholders. In fact, in some cases, the dividend to the preferred stockholders may be guaranteed by the corporation, rather than granted periodically by the board of directors, which is often the case with common stock dividends. For this reason, many investors who wish to receive a constant cash flow may choose to own preferred stock rather than common stock.

Preferred stockholders should be aware, however, that although preferred stock dividends may be guaranteed by the company, payouts may be deferred if a company is in financial distress, which could occur at the exact time when an investor has the greatest need for the income.

The greatest benefit for preferred stockholders over common stockholders, however, occurs when a company is bankrupt. For example, if a company is forced to declare bankruptcy and liquidate their assets, the preferred stockholders are much more likely to receive payouts for their investments. Common stockholders will generally not be paid at all or will have to wait to receive their payments until all other creditors, bondholders and preferred stockholders have been paid.

Preferred stock investments can be made like other stock investments. Decisions to invest should not be made, however, if an investor does not know and does not understand what they are purchasing. Orders can be placed by opening a brokerage account, either through an online brokerage firm or a traditional brokerage firm. Some companies may also let an investor purchase preferred stock directly through them, allowing the investor to avoid paying certain commissions to a broker.

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