Accounting Dictionary

Preferred Stock

Let’s say you buy preferred stock from a company for $40,000. If the company goes out of business, they must repay first their creditors, then the preferred stockholders, and lastly the common stock holders. The preferred stockholders get preferred treatment compared to the common stockholders. If the company is low on cash, they must pay dividends to all their preferred stockholders before they can pay the common stockholders. Preferred stockholders get preferred treatment on dividends as compared to the common stockholders.

Normally preferred stockholders do not vote at shareholder elections. Because they have no vote, the stock does not go up much during corporate takeovers. Normally preferred stockholder have a set dividend. If the company makes a huge profit, preferred dividends do not increase. Therefore preferred stock does not go up much when a company is very profitable.

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