What Are Preferred Shares?

by Craig Anthony

1 min read

Preferred shares, also called preferred stock or preference shares, are a class of stock shares in a corporation that are higher-ranking in the capital structure than common stock. Owners of preferred shares have a higher claim on the company’s earnings and assets. It’s important to keep in mind that preferred shares are lower-ranking in the capital structure than bonds. Preferred shares let a corporation raise capital without any dilution of control through accumulated voting rights.Typically, preferred stock has the following characteristics that common stock does not have:

  • Preference in dividends (meaning that dividends get paid to owners of preferred shares first)
  • Preference in assets (if the company liquidates)
  • An option to convert to common stock (while common stock doesn’t have the option to convert to preferred stock)
  • The ability to be called (that is, redeemed early) by the company
  • Non-voting shares

Due to negotiations, bulk purchases, and tax advantages, institutions are normally the initial buyers of preferred shares, not individual stock owners. Preferred shares come in a variety of types, each with their own unique characteristics. Types of preferred shares include, but are not limited to: prior preferred, preference preferred, cumulative preferred, exchangeable preferred, participating preferred, perpetual preferred, putable preferred, non-cumulative, and supervoting.

References & Resources

Related Articles

External Financing: A Guide to Issuing Bonds

You might not qualify for a traditional business loan from a bank,…

Read more

Differences Between Perpetual and Periodic Inventory Systems

The two main types of inventory systems give a small business flexibility…

Read more

Understanding Capital Markets

“Capital markets” is a broad definition for the markets in which buyers…

Read more