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Question

What is Preferred Stock?

Answer

Preferred stock is an equity investment that carries some of the characteristics of debt securities (such as bonds).  It usually represents a safer investment than common stock.  It is a form of capital stock that provides dividends and other privileges to its holders.  It is a separate class of stock from common stock, and is therefore priced and traded separately from common stock.

Anyone can purchase preferred stock and it can often be converted into common stock at a later stage.  Generally issued by larger blue chip corporations, preferred stock is considered a useful component for stability and income in any investor's portfolio.

If you are a preferred stockholder in a company, you will be paid dividends prior to the holders of common stock (assuming a dividend is declared).
Moreover, in the event of bankruptcy or liquidation of the company, your claim on the assets and distributions of the company rank ahead of those of common stockholders.  Note, however, that the claims of debt security holders still precede those of preferred stockholders.

Preferred stock usually carries a fixed dividend payment, whereas the dividend payable to common stockholders depends on the overall performance of the company. Preferred stock dividends are guaranteed and generally higher than those paid on common stock.

Unlike common stock, however, you may not always have voting rights if you purchase preferred stock, as companies can issue both voting and non-voting preferred stock. Furthermore, preferred stock is less liquid than common stock and, because it does not count fully in the company's profits, the growth in value of preferred stock is generally less than that of common stock.

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