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Preferred stock

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A preferred stock is stock that has certain rights which are senior to common stock. This may be in the payment of dividends or the liquidation of assets.

1 Expanded Definition
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Expanded Definition

In the hierarchy of claims upon a company's assets and earnings, common stock is at the bottom. To compensate, it gets the right to vote at annual meetings, elects the board of directors, etc. Preferred stock has a higher claim that must be satisfied before the claim of common stock may be satisfied. This can be in the form of dividends which are paid first to preferred stock, and then to common stock. Preferred stock usually has no voting right. Debt (bank loans to the company and bonds) has a higher claim, still.

Depending on the terms of the issue (a company can issue several different types or "series" at different times), the preferred stock may or may not include any of the following:

Preference in the payment of dividends (usually present)
Dividends are often cumulative. That is, if they are not paid in a given year, they accumulate and are owed in future years.
Claim on liquidation proceeds of a company, ahead of common stock, but behind debt-holders.
A fixed dividend amount, usually determined at the time of issuance and often higher than any dividend amount paid to common shares. Can be floating and tied to a common metric such as LIBOR.
Certain voting rights, such as the approval of certain extraordinary events.
Often contains protection against the issuance of other preferred stock (especially senior to a given issuance).

The actual terms for a given issue are spelled out at the time of issuance and should be fully understood by any purchaser.

Because of the (usual) fixed dividend amount, preferred stock is often viewed as a hybrid security, with characteristics of both a bond and a stock share. The potential for capital gains from preferred stock is usually not as high as it is for common stock, but the (usually) higher and guaranteed dividend makes up for that.

Some preferred stock issues are callable. The issuer may call (buy) the issue at a specified price from the owner on or after a specified date. The details are listed in the prospectus for the issue. QuantumOnline [1] does an excellent job of summarizing call provisions. It also provides links to the original prospectus for the issue. (But the bond ratings shown are when issued and may not be current.)

Those considering purchase of a preferred stock should reseach call provisions. Yields are often supported by the call price. Paying a premium over the call price can result in having the issue called out from under you at a loss. Hence, preferred stocks near or after their call date often have their market value held down by the call price. That can cause them to show up listings as having remarkably high yields. Be especially careful of issues paying above market yields.

Asset backed securities or trust preferred issues are a new class of bonds. They are listed and traded on major stock exchanges as preferred stocks. Each issue is backed by a single corporate bond. Hence, these are in effect corporate bonds traded on major stock exchanges and available at discount broker commissions.