12.5 : Preferred Stock Features

Preferred stock is a unique type of equity security that combines features of both common stock and bonds. Here are its key features:

1. Dividend Priority: Preferred stockholders receive dividends before common stockholders. These dividends are typically fixed and paid regularly, making preferred stock more predictable than common stock.
2. Fixed Dividend: The dividend rate is usually fixed as a percentage of the par value or a specified amount, providing consistent income.
3. Preference in Liquidation: If a company is liquidated, preferred shareholders have a higher claim on assets than common shareholders but rank below bondholders.
4. Non-Voting Rights: Generally, preferred stockholders don't have voting rights in corporate decisions, unlike common shareholders.
5. Convertible Option: Some preferred stocks convert into common stock at a predetermined ratio, offering the potential for capital appreciation.
6. Callable Feature: Companies can repurchase or "call" preferred stock at a predetermined price, allowing flexibility in managing equity.
7. Cumulative Dividends: If a company skips dividend payments, cumulative preferred stockholders must be paid arrears before common dividends are resumed.
8. Risk-Reward Balance: Preferred stocks are less risky than common stocks but provide lower growth potential.

These features make the preferred stock appealing for investors seeking steady income with moderate risk.