Preferred Stock 101

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 Safety Pretzel Co. (ticker: GAACK), whose spokesperson is President Bush, 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.

You can learn more about how the financial world works in our Investing Basics. To learn to more about brokerages and possibly find a better brokerage for yourself, check out our Broker Center.


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