The preferred securities, also called preferred shares/stock are typically highest ranking values of common stock, and their terms are negotiated between the corporation and the investor.
The preferred securities usually have no right to vote, but can have priority over common stock in payment of dividends, and upon reaching the settlement. The preferred securities may have a dividend that is paid before any dividends are paid to common shareholders.
In bankruptcy, preferred shareholders will be paid after creditors but ahead of common shareholders. The terms of the preferred securities are established in a Certificate of Appointment, the shares are convertible into common stock, provided that the general meeting of a joint stock company approves the decision.
Unlike common stock, preferred shares generally have a number of additional rights. The dividend rights are often cumulative, so that if the dividend is not paid it is cumulative from year to year.
Preferred shares can be with or without a fixed liquidation value associated with them. This represents the amount of capital contributed to the corporation when the shares were issued.
They also enjoy right to property of a corporation with shares equivalent to its liquidation value unless otherwise negotiated. This right is superior to common stock, and almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the liquidation value or as a fixed amount.
In some cases, preferred stock dividends can be negotiated as floating, that is, may vary according to a rate specified interest rate such as LIBOR.
Some preferred shares have special voting rights which apply to certain extraordinary events such as the issuance of new shares or the approval of the acquisition of the company or to elect directors, but most preferred shares have no voting rights associated with them. While some preferred shares get voting rights only when preferred dividends are in arrears for a considerable time.
There are different types of preferred securities that are common to many corporations and these include:
Cumulative preference shares – paid in future if the dividend is not paid. Non-cumulative preference shares – The dividend for this type of preferred stock will not be cumulative if not paid.
Convertible preferred stock – This type of preferred stock have the option of becoming a common stock at a specified price.
Exchangeable preferred stock – comes with the option to be exchanged for other security under certain conditions.
Monthly income preferred shares – a combination of preferred stock and subordinated debt.
Perpetual preferred stock – no fixed date on which the capital invested is returned to shareholders, although there will always be redemption privileges controlled by the corporation. Most preferred shares are issued without a fixed date of redemption.
Preferred shares financial option – These emissions have the privilege of a ‘financial option’ under which the shareholder may, under certain conditions, force the issuer to redeem the shares.