What is Preferred Stock?

Preferred Stock is a class of equity that entitles holders to receive specified dividends before any dividends are paid to common shareholders. In the event of liquidation, preferred shareholders have priority over common shareholders for asset distribution.

Why is Preferred Stock Important?

Preferred Stock is important because it:

• Provides Stable Income: Offers fixed or adjustable dividends, appealing to income-focused investors.
• Balances Risk and Return: Ranks above common stock in dividends and liquidation, reducing risk compared to common equity.
• Offers Capital Structure Flexibility: Allows companies to raise equity-like capital without diluting voting control.

How is Preferred Stock Measured?

On the balance sheet, Preferred Stock is recorded at its issuance value:

Preferred Stock = Par Value × Number of Shares Issued + Additional Paid-In Capital

Where:

• Par Value: The nominal value assigned to each share.
• Additional Paid-In Capital: Amount received over par value at issuance.

Additional Considerations

• Convertible Features: Some preferred shares can convert into common stock under specified conditions, impacting dilution.
• Callable and Redeemable Terms: Issuers may have the right to repurchase (call) or investors to sell back (redeem) the shares at predefined prices.
• Cumulative vs. Non-Cumulative: Cumulative preferred accrues unpaid dividends, whereas non-cumulative does not, affecting dividend obligations.