Preferred Stock
Preferred by whom?
By
Selena Maranjian (TMF Selena)
July 31, 2002
Q. What is preferred stock?
A. Like common stock, shares of preferred stock represent partial ownership of a company. Preferred stock isn't really meant for individual investors, though. It's usually purchased by other corporations that are attracted by a fixed dividend that's higher than the common stock dividend and that gives them income taxed at a lower rate.
Corporations also like the fact that preferred stockholders' claims on company earnings and assets have a higher priority than that of common stockholders. If the Fish Juice Co. (ticker: GAACK) goes out of business, many people or firms with claims on the company will want their due. Creditors will be paid before preferred stockholders, but preferred stockholders have a higher priority than common stockholders.
Unlike holders of regular common stock, holders of preferred stock typically have no voting privileges. Preferred stock also tends to not appreciate in value as much as common stock can. We've generally avoided investing in preferred stock, but some investors might be interested in them, for the dividends. Learn more in this article on the power of preferred stock.
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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.
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