Preferred Stock

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Related to Preferred Stock: Convertible preferred stock

Preferred Stock

Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders.

Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. The earnings of a corporation are applied to this payment before common stockholders receive dividends. If corporate earnings are insufficient for the fixed annual dividend, the preferred stock will absorb the total amount of earnings, and the common stockholders will be precluded from receiving a dividend. When corporate income exceeds the amount that is needed to pay preferred stockholders, the remainder is generally paid to common stockholders. In special situations, the remainder may be distributed pro rata to both classes of stock, in which case the preferred stock is said to "participate" with the common stock.

Preferred stock can be cumulative or noncumulative. If it is cumulative and if the fixed dividend remains unpaid, it becomes a debit upon the surplus earnings of succeeding years. Accumulated dividends must be paid in full before common stockholders can receive dividends. When preferred stock is noncumulative, its preference is extinguished by the failure of the corporation to have sufficient earnings to pay the fixed dividend in a given year.

preferred stock

n. a class of shares of stock in a corporation which gives the holders priority in payment of dividends (and distribution of assets in case of dissolution of the corporation) over owners of "common" stock at a fixed rate. While the assurance of first chance at profits is a psychological and real benefit, preferred stock shareholders do not participate in higher dividends if the corporation makes large profits, and usually cannot vote for directors. (See: corporation, stock, common stock)

References in periodicals archive ?
Section 351(g)(2)(C) sets forth additional exceptions for disregarding certain rights or obligations of purchase or redemption in determining whether preferred stock is considered NQPS.
The temporary regulations provide that nonqualified preferred stock and rights to acquire nonqualified preferred stock are not treated as stock or a security if received in exchange for stock other than nonqualified preferred stock, or for a right to acquire stock other than nonqualified preferred stock.
Chapter 14 was proposed as an addition to the IRC that would provide a special value for the retained preferred stock solely for the purpose of valuing common stock sold or given in a freeze transaction.
The parent's will would bequeath the preferred stock to a marital trust for the surviving spouse (typically structured as a qualified terminable interest property (QTIP) trust in order to maintain control of the ultimate disposition of stock in the stockholder parent's will).
The EITF considered the following situation: An employer issues convertible preferred stock to an ESOP.

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