The following is a list of the significant characteristics of preferred stock as compared to the
other two securities, common stock and bonds.
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Preferred Stock Characteristics
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• Preferred stock does not provide the preferred stockholder a claim to ownership or voting
rights in the firm.
• Preferred stock does entitle the stockholder to priority over the common stockholders in
claims on the firm’s assets in the event of bankruptcy.
• Preferred stockholders receive periodic dividends instead of interest, however, unlike
with bond interest, failure to pay the dividends is not a cause for bankruptcy.
• Multiple classes of preferred stock can be issued with each class having different
• Preferred stock normally carries a cumulative feature that requires that all past unpaid
preferred stock dividends must be paid in full before any common stock dividends can be
• Preferred stock may contain other varied protective and incentive provisions that are
designed to protect the investor’s investment.
• Preferred stock may contain a provision that allows it to be converted to a predetermined
number of shares of common stock (convertible preferred).