WHAT IS PREFERRED STOCK?
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All stocks are
units of ownership in corporate America. One way a company raises money at
start-up or to expand is by selling ownership shares?or stocks?in the
organization. Stock certificates list the name of the owner and the number of
shares owned. The certificates also indicate the class of stock
owned?common or preferred.
Each entitles the stockholders to somewhat different ownership
rights. Owners of preferred stock receive dividends from company earnings
at a set rate, which is usually higher than the dividend rates received by
owners of common stock. The amounts may be a specific dollar figure or a
percentage of par. Par is the face value the company has put on the
stock?for example, $1 per share. It has no relation to what the stock may later
sell for on the secondary market.
Preferred stock owners always receive their dividends before the
company pays any dividends to common stockholders. And, in the event of a
company's liquidation, preferred stockholders would receive payment for their
shares before owners of common stock receive any payment.
Another difference between preferred and common stock is that
preferred stock may not always entitle the shareholders to vote in
Preferred stockholders generally bear less risk than common
stockholders. They also will likely receive lower total returns; however, they
enjoy greater safety in return.
Now that you have reviewed the basic features of preferred
stocks, let's discuss how to obtain the stocks.