Preferred Stocks

From Financial Literacy Wiki

Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, and its terms are negotiated between the corporation and the investor.

Preferred stock usually does not carry voting rights but can carry superior voting rights to common stock. Preferred stock may carry a dividend that is paid out prior to any dividends to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy.

Possible Features (Rights)

Unlike common stock, preferred stock usually has several rights attached to it:

• The core right is that of preference in the payment of dividends. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.
• The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year.
• Preferred stock may not have a fixed liquidation value, or par value, associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued.
• Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.
• Most preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount.
• Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them.

Do note that the above lists is not comprehensive, it really depends on the how the issuers structure the preference shares.

Preference shares are usually issued by corporate to gather working capital. In 2008, both DBS Ltd and OCBC Bank Ltd issued preference shares to raise their Tier 1 Capital.

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