Would You Like to Buy Preferred Stock? Part 3

We are going to finish our conversation on Preferred Stock by looking at Prior Preferred Stock and a few other definitions in the world of preferred. Prior Preferred Stock is a type of preferred stock with a higher claim on assets and dividends than other issues of preferred stock. If a firm did not generate enough money to fulfill its full dividend schedule requirements, those holding prior preferred stocks have first priority.

Investopedia explains Prior Preferred Stock this way. “Since prior preferred stock holders have a higher claim on the dividends of a company during normal operations and a higher claim on assets during bankruptcy, these shareholders are subject to less risk than other preferred or common shareholders. As with many other lower risk investments, these stocks normally offer a lower rate of return relative to other forms of stock because they are subject to less risk.”

A Callable Preferred Stock is a type of preferred stock that carries the provision that the issuer has the right to call in the stock at a certain price and retire it. This is also known as "redeemable preferred stock". This can be good or bad depending on the price you bought it and the callable price.

According to Investopedia, Participating Preferred Stock is “a type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition.”

“The additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that common shareholders receive exceeds a specified per-share amount.”

“Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back as well as a pro-rata share of any remaining proceeds that the common shareholders receive.”

“For example, suppose “Company A” issues participating preferred shares with a dividend rate of $1 per share. The preferred shares also carry a clause on extra dividends for participating preferred stock, which is triggered whenever the dividend for common shares exceeds that of the preferred shares.”

“If during its current quarter, Company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) as well.”

“Participating preferred stock is rarely issued, but one way in which it is used is as a poison pill. In this case, current shareholders are issued stock that gives them the right to new common shares at a bargain price in the event of an unwanted takeover bid.”

Investopedia explains Contingent Voting Power as “a provision granting voting rights to preferred shareholders when the company cannot uphold the obligations outlined in the preferred shareholder arrangement. Contingent voting powers offer the shareholders additional security for holding preferred instruments.”

“With preferred stock, the primary source of income is generated from dividends because capital appreciation is minimal. Contingent voting powers may come into effect when the firm fails to make the dividend, eliminating the revenue of the preferred group. Armed with the power to vote, preferred shareholders may seek to remedy the financial difficulties that are restricting dividends by voting in new directors.”

If you are interested in investing or speculating in Preferred Stock, you may have to check the financial newspaper’s stock market listings, the websites of the corporations that you might be interested in, or call your brokerage firm for information.

THE END

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