Can Someone Explain Preferred Stock?


2 Answers

Syed Rizwan Ali Shah Hamdani Profile
Preferred Stock:    It is the stock with a predetermined or fixed dividend. In case, the board of directors announces dividends, the preferred stockholders would have a priority claim on them, i.e., they would be paid dividends before any dividends are paid to the common stockholders. However, if the board opts to retain earnings, the preferred stock would not yield a dividend, and thus cash flows from a preferred dividend are not as certain as income of the bondholders.      Dividends are paid out of net income. Shareholders get a part of the net profit of the company during the year, proportional to their shareholdings, and it is for the management to decide how much of the profit is to be distributed among the shareholders.  Now, we will see how these shares and bonds will appear on the face of a balance sheet. We will have to look at these shares and bonds from two aspects, the shares and bonds that the company issues and the shares and bonds that company invest in. The shares and bonds that a company purchases as an investment will come on the asset side under the section of marketable securities. These shares and bonds have been purchased by the company to generate extra income. On the other hand, those shares and bonds that the company issues to raise funds will appear on the liability side.      If the company has concerned bonds, they will be classified as liability. But if the company has issued equity shares, they will appear under the section of common equity on liability side in the balance sheet.
John Baize Profile
John Baize answered
The use of preferred stock is common when a company tries to attract investors. Preferred shareholders do not having voting rights like common shareholders. Some have convertibility features (such as being able to convert them for multiple common shares).

This gives a company the flexibility of negotiating investment terms to satisfy the needs of both the company, the existing shareholders and the investors.

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