Understand Equity Market - Preferred Stock

Preferred stocks (or preference shares) are different from common stocks. They generally do not have voting rights on matters of corporate policy, their dividends are fixed and preference dividends will be paid prior to common share dividends.

Generally, there are four different types of preferred stock: participating preferred stock, cumulative preferred stock, non-cumulative preferred stock, and convertible preferred stock.

1) Participating preferred stock: This gives stockholders the right to receive a specified dividend plus the right to additional earnings based on some predetermined condition.

2) Cumulative preferred stock: This gives stockholder the right to accumulate dividend that is not paid. The unpaid amounts will be paid in future when there are sufficient profits generated.

3) Non-cumulative preferred stock: This type of stock does not give holder the right to receive dividends that were previously omitted.

4) Convertible preferred stock: This type of stock can be converted into shares of common stock at the holder's option. The price of the conversion is fixed, and such conversion can be made at any time.