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Preferred Stock, Explained

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; they're lured by a fixed dividend that's higher than the common-stock dividend, which gives them income that's taxed at a lower rate.

Corporations also like that claims on company earnings and assets by holders of preferred stock have a higher priority than those of investors who hold common stock. If the Two-Legged Chair Co. (Ticker: OOOPS) goes out of business, many people or firms with claims on the company will want their due. Creditors will be paid before preferred stockholders are, 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 such shares for the dividends. Learn more in this article on the power of preferred stock.

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