Preferred equity

Preferred stock (also called preferred shares, preference shares or simply preferreds) is a type of which may have any combination of features not possessed by including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stocks are senior (i.e., higher ranking) to common stock, but subordinate to bonds in terms of claim (or rights to their share of the assets of the company) and may have priority over common stock (ordinary shares) in the payment of dividends and upon liquidation. Terms of the preferred stock are described in the articles of association.

Like bonds, preferred stocks are rated by the major credit-rating companies. The rating for preferreds is generally lower than for bonds because preferred dividends do not carry the same guarantees as interest payments from bonds and because preferred-stock holders' claims are junior to those of all creditors.

Preferred stock is a special class of shares which may have any combination of features not possessed by common stock. The following features are usually associated with preferred stock:

In general, preferred stock has preference in dividend payments. The preference does not assure the payment of dividends, but the company must pay the stated dividends on preferred stock before paying any dividends on common stock.

Preferred stock can be cumulative or noncumulative. A cumulative preferred requires that if a company fails to pay a dividend (or pays less than the stated rate), it must make up for it at a later time. Dividends accumulate with each passed dividend period (which may be quarterly, semi-annually or annually). When a dividend is not paid in time, it has "passed"; all passed dividends on a cumulative stock make up a dividend in arrears. A stock without this feature is known as a noncumulative, or straight, preferred stock; any dividends passed are lost if not declared.

The above list (which includes several customary rights) is not comprehensive; preferred shares (like other legal arrangements) may specify nearly any right conceivable. Preferred shares in the U.S. normally carry a call provision, enabling the issuing corporation to repurchase the share at its (usually limited) discretion.

In addition to straight preferred stock, there is diversity in the preferred stock market. Additional types of preferred stock include:

Preferred stocks offer a company an alternative form of financing—for example through pension-led funding; in some cases, a company can defer dividends by going into arrears with little penalty or risk to its credit rating, however, such action could have a negative impact on the company meeting the terms of its financing contract. With traditional debt, payments are required; a missed payment would put the company in default.

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