Definition
The financial accounting term preferred stock refers to a class of equities issued by corporations that contains special preferences, or features, that are not present in common stock. Preferred stock dividends are typically paid before those of common stocks; however, they usually don't have the voting rights common shareholders enjoy.
Explanation
Preferred stocks are often described as a hybrid between common stocks and bonds. The value of preferred stock issued by a company can be found in the owner's equity section of the company's balance sheet.
Generally, preferred stock exhibits one or more of the following features or characteristics:
Claim to Assets: stockholders are paid after bondholders, but before common stockholders in the event of liquidation.
Par Value: preferred shares are typically assigned a dollar value, which is the amount that would be paid to shareholders in the event of liquidation.
Nonvoting Convertible Preferred: stockholders are not allowed to participate in the voting process normally offered to holders of common stock.
Convertible Preferred Stock: shares of the preferred stock may be convertible to common stock at a pre-determined ratio.
Fixed Dividends: preferred stock is generally paid dividends before common stockholders.
Callable Preferred Stock: preferred stock can often be retrieved by the company at a pre-determined price and usually after a fixed amount of time has elapsed.
