Preferred Stock
A class of equity with priority over common stock for dividend payments and asset distribution in liquidation, typically without voting rights.
What is Preferred Stock?
Preferred stock is a hybrid security that combines characteristics of both equity and fixed-income instruments. Preferred shareholders receive dividends before common stockholders, and those dividends are typically fixed at a stated rate — making preferred stock behave somewhat like a bond. In the event of bankruptcy, preferred shareholders rank above common shareholders but below debt holders in the liquidation waterfall. Most preferred shares do not carry voting rights, and many are callable, meaning the issuer can redeem them at a specified price. Preferred stock is often issued by financial institutions, utilities, and companies seeking to raise capital without diluting common shareholder voting power. The dividends may be cumulative (unpaid dividends accumulate) or non-cumulative.
Example
When Bank of America issued 6.204% Series GG Non-Cumulative Preferred Stock at $25 par value, investors received fixed quarterly dividends at that rate regardless of what common stock dividends were paid. In years when the bank cut its common dividend — as occurred during the 2008 financial crisis — preferred holders continued receiving priority payments, demonstrating the seniority advantage that preferred shareholders hold over common stockholders.
Source: Investopedia — Preferred Stock