Preferred stock

Definition

Preferred stock in plain English

Preferred stock is a special kind of ownership share that behaves like a hybrid between owning and lending. It pays a fixed, agreed-upon dividend (a set cash payment) rather than a payment that swings with profits, and if the company goes bankrupt and sells off everything, preferred shareholders get paid back before regular ("common") shareholders do. Think of it as being closer to the front of the line: you give up the thrill of big gains that common stockholders might get, in exchange for steadier payments and better protection if things go wrong. It's "preferred" because it gets preference — priority — over common stock in those two ways.

Learn these first

• Cost of preferred equity
• Par value

Related Principles of Finance terms

• Accrued interest
• Allocation effect
• Basis
• Basis point
• Benchmark
• Bond-equivalent yield (BEY)
• Bootstrapping
• Callable bond
• Clean price
• Comparable company analysis (comps)