SIE (Training Consultants v3.5, 2025): Ch. 1 Equity Securities, Sec. 6 - Fundamentals of Preferred Stock

Preferred Stock

A class of equity security that has priority over common stock in receiving dividends and in asset distribution upon liquidation.

Equity Security

A security representing ownership in a corporation; preferred stockholders are owners, not creditors.

Fixed Income Security

A security that pays a fixed dividend or interest; preferred stock is considered fixed income because its dividend is fixed.

Dividend on Preferred Stock

Typically stated as a percentage of par (usually $100) or as a fixed dollar amount for no-par shares; may also be variable.

Voting Rights (Preferred Stock)

Preferred stock generally does not have voting privileges.

Volatility (Preferred Stock)

Generally less volatile than common stock.

Cumulative Preferred Stock

Requires that all dividends in arrears and current year must be paid before common stock dividends.

Convertible Preferred Stock

Can be converted into common stock at the shareholder’s option; conversion may dilute EPS.

Participating Preferred Stock

Pays a fixed minimum dividend but also allows participation in additional earnings alongside common shareholders.

Callable Preferred Stock

May be redeemed (called) by the issuer at a set premium after a specified date; favors the issuer.

What is preferred stock?

A class of equity security with priority over common stock for dividends and asset distribution.

Are preferred stockholders owners or creditors?

Owners; preferred stock is an equity security.

Why is preferred stock considered a fixed income security?

Because it pays a fixed dividend, making it sensitive to interest rate changes.

How is a preferred stock dividend typically expressed?

As a percentage of par (usually $100) or a fixed dollar amount; may also be variable.

Do preferred stockholders usually have voting rights?

No, preferred stock generally does not carry voting privileges.

How does the volatility of preferred stock compare to common stock?

Preferred stock is generally less volatile than common stock.

What is cumulative preferred stock?

Preferred stock where all unpaid (arrears) and current dividends must be paid before common dividends.

What is convertible preferred stock?

Preferred stock that can be converted into common stock at the shareholder’s option, which may dilute EPS.

What is participating preferred stock?

Preferred stock with a fixed minimum dividend and the right to share in additional earnings with common shareholders.

What is callable preferred stock?

Preferred stock that can be redeemed by the issuer at a set premium after a specified date; favors the issuer.

Which types of preferred stock favor the shareholder?

Cumulative, convertible, and participating preferred stock.

Which type of preferred stock favors the issuer?

Callable preferred stock.