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Types of Preferred Stock 


In addition to the straight preferred, as just described, there is great diversity in the preferred stock market. Additional types of preferred stock include:
  • Prior Preferred Stock 

  • Many companies have different issues of preferred stock outstanding at the same time and one of them is usually designated to be the one with the highest priority. If the company has only enough money to meet the dividend schedule on one of the preferred issues, it makes the dividend payments on the prior preferred. Therefore, prior preferred have less credit risk than the other preferred stocks but it usually offers a lower yield than the others. 
  • Preference Preferred Stock 

  • Ranked behind the company's prior preferred stock ( on a seniority basis, are the company's various preference issues. These issues receive preference over all other classes of the company's preferred except for the prior preferred. If the company issues more than one issue of preference preferred, then the various issues are ranked by their relative seniority. One issue is designated first preference, the next senior issue is the second and so on. 
  • Convertile Preferred Stock 

  • These are preferred stock that the stockholders can exchange for a predetermined number of the company's common stock. This exchange can occur at any time the investor chooses regardless of the current market price of the common stock. It is a one tie deal so you cannot convert the common stock back to preferred stock. 
  • Participating Preferred Stock 

  • These stocks offer the investors the opportunity to receive extra dividends if the compnay achieves some pretedetermined financial goals. The investors who purchased these stocks receive their regular dividend regardless of how well or how poorly the company performs, assuming of course, the company does well enough to make the annual dividend payments. If the company achieves predetermined sales, earnins or profitability goals, the investors receive an additional dividend. 
  • Cumulative Preferred Stock 

  • If a dividend on a cumulative preferred is missed, it is not forgotten. Instead, it accumulates and must be paid off before any dividend payments are made to the common stockholders. 
A company can issue cumulative prior preferred, participating preference preferred or any other combination of preferred stock. 

 


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This page is created by Julia Lee '99 and is maintained by Professor Satyananda Gabriel of the Economics Department, Mount Holyoke College, January 1999.