Preferred Stock
Preferred Stock
Preferred stock
is different from common stock in that preferred stock owners get their
dividend payments before the common stock owners. Also, should the company go out of
business, preferred stock owners get paid their share of whatever's left before the owners of
common stock get paid.
So why isn't everyone buying preferred stock? First, companies don't issue preferred stock
until after common stock has been issued, so there's less of it. Second, preferred stock
owners don't generally get proxy rights. Third and most important, preferred stock owners
usually get paid a preset dividend regardless of how much money the company makes.
Further confusing things, companies can issue any number of different preferred stocks, or
classes. Usually, the different kinds are labeled A, B, C, etc., and each class can have a
different price or dividend. These classes are highly flexible regarding their similarities and/or
differences to each other. This flexibility is necessary to accommodate the circumstances of
the issuing company at the time. For that reason, it would be difficult if not impossible to
provide a complete listing of preferred stock classes anywhere. As always, the responsibility
of discovering the nuances of each class is left up to the investor.
The 30-Second Recap
A stock represents a proportional ownership of a company.
Stocks make money when the company makes a profit and splits it among the
stockholders (known as a dividend) or when the actual value of the company goes up
(known as a capital gain).
Valuing a company is the sum of its assets and liabilities; this is also known as its net
worth.
Stocks are split into two issues-common stock that appeals more to individual
investors; and the various classes of preferred stock that are geared more to the needs
of institutional investors.
Various terms have arisen to describe the different behaviors of stock including blue
chip, secondary, income, growth, and penny stocks.
