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Preferred Stock

Unlike common stock, holders of preferred stock are entitled to fixed dividends and fixed rights to receive a percentage of a corporation’s assets are liquidated. With respect to the dividend rights, an example of such stock would include a name such as “$20 preferred,” which means the shareholder has a right to receive $20 in dividends per share before dividends are paid to common stock owners.

It is noteworthy that the board of directors in a corporation usually has the discretion to decide whether dividends are issued in a given year. If dividends are not distributed during one year, whether preferred stock owners receive dividends in a subsequent year depends on whether the preferred stock is cumulative or noncumulative. If the rights are cumulative, the corporation must be dividends during some subsequent year. If the rights are noncumulative, the rights to receive dividends are lost if the corporation does not issue dividends in a given year.

Preferred stock owners generally do not have the same rights to vote as common stock owners. However, a corporation may grant voting rights and additional rights in its articles of incorporation or other provisions. State statutes also provide some rights to preferred stock owners by default.

Inside Preferred Stock