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Encyclopedia > Preferred stock
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This article does not cite any references or sources. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond (or muni) is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. ...

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The derivatives markets are the financial markets for derivatives. ... // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... This article is about options traded in financial markets. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

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Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, and its terms are negotiated between the corporation and the investor. Voting shares are shares that give the stockholder the right to vote on matters of corporate policy making as well as who will compose the members of the board of directors. ...


Preferred stock usually carry no voting rights but may carry superior voting rights to common stock.[1][2] Preferred stock may carry a dividend that is paid out prior to any dividends to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a "Certificate of Designation".

Contents

Rights

Unlike common stock, preferred stock usually has several rights attached to it:

  • The core right is that of preference in the payment of dividends and upon liquidation of the company. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.
  • The dividend rights are often cumulative, such that if the dividend is not paid it accumulates from year to year.
  • Preferred stock may or may not have a fixed liquidation value, or par value, associated with it. This represents the amount of capital that was contributed to the corporation when the shares were first issued. [3].
  • Preferred stock has a claim on liquidation proceeds of a stock corporation, equivalent to its par or liquidation value unless otherwise negotiated. This claim is senior to that of common stock, which has only a residual claim.
  • Almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred. Sometimes, dividends on preferred shares may be negotiated as floating i.e. may change according to a benchmark interest rate index such as LIBOR.
  • Some preferred shares have special voting rights to approve 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 provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time.
  • Usually preferred shares contain protective provisions which prevent the issuance of new preferred shares with a senior claim. Individual series of preferred shares may have a senior, pari-passu or junior relationship with other series issued by the same corporation.
  • Occasionally companies use preferred shares as means of preventing hostile takeovers, creating preferred shares with a poison pill or forced exchange/conversion features that exercise upon a change in control.

The above list, although including several customary rights, is far from comprehensive. Preferred shares, like other legal arrangements, may specify nearly any right conceivable. Preferred shares in the U.S. normally carry a call provision[4], enabling the issuing corporation to repurchase the share at its (usually limited) discretion. It has been suggested that ex-dividend date be merged into this article or section. ... Par value has several meanings depending on the context, whether used in the equities market, or in the bond markets, and partially also dependent on where in the world the par value term is used. ... Winding up redirects here. ... A stock corporation is a for-profit corporation which the ownership of the corporation is expressed by shares of stock. ... It has been suggested that ex-dividend date be merged into this article or section. ... This article is about the moral/legal concept. ... See stock (disambiguation) for other meanings of the term stock A stock, also referred to as a share, is commonly a share of ownership in a corporation. ... pari passu is a Latin phrase that means at the same pace, and by extension also fairly, without partiality. In finance this term refers to two or more loans, bonds or series of preferred stock having equal rights of payment, i. ... For other uses, see Corporation (disambiguation). ... Hostile takeover can refer to: For the business usage see takeover. ... Poison pill originally meant a literal poison pill (often a glass vial of cyanide salts) carried by various spies throughout history, and by Nazi leaders in WWII. Spies could take such pills when discovered, eliminating any possibility that they could be interrogated for the enemys gain. ...


Some corporations contain provisions in their charters authorizing the issuance of preferred stock whose terms and conditions may be determined by the board of directors when issued. These "blank check" preferred shares are often used as takeover defense (see also poison pill). These shares may be assigned very high liquidation value that must be redeemed in the event of a change of control or may have enormous supervoting powers. Poison pill originally meant a literal poison pill (often a glass vial of cyanide salts) carried by various spies throughout history, and by Nazi leaders in WWII. Spies could take such pills when discovered, eliminating any possibility that they could be interrogated for the enemys gain. ...


Users

Preferred shares are more common in private or pre-public companies, where it is more useful to distinguish between the control of and the economic interest in the company. Government regulations and the rules of stock exchanges may discourage or encourage the issuance of publicly traded preferred shares. In many countries banks are encouraged to issue preferred stock as a source of Tier 1 capital. On the other hand, the Tel Aviv Stock Exchange prohibits listed companies from having more than one class of capital stock.[citation needed] For other uses, see Bank (disambiguation). ... Tier 1 capital is the core measure of a banks financial strength from a regulators point of view. ... The Tel Aviv Stock Exchange (TASE) in Tel Aviv (‎, colloquially known as the Bourse) is Israels only stock exchange. ...


A single company may issue several classes of preferred stock. For example, a company may undergo several rounds of financing, with each round receiving separate rights and having a separate class of preferred stock; such a company might have "Series A Preferred", "Series B Preferred", "Series C Preferred" and common stock.


In the United States there are two types of preferred stocks: straight preferreds and convertible preferreds. Straight preferreds are issued in perpetuity (although some are subject to call by the issuer under certain conditions) and pay the stipulated rate of interest to the holder. Convertible preferreds--in addition to the foregoing features of a straight preferred--contain a provision by which the holder may convert the preferred into the common stock of the company (or, sometimes, into the common stock of an affiliated company) under certain conditions, among which may be the specification of a future date when conversion may begin, a certain number of common shares per preferred share, or a certain price per share for the common.


There are income tax advantages generally available to corporations that invest in preferred stocks in the United States that are not available to individuals.


Some argue that a straight preferred stock, being a hybrid between a bond and a stock, bears the disadvantages of each of those types of securities without enjoying the advantages of either. Like a bond, a straight preferred does not participate in any future earnings and dividend growth of the company and any resulting growth of the price of the common. But the bond has greater security than the preferred and has a maturity date at which the principal is to be repaid. Like the common, the preferred has less security protection than the bond. But the potential of increases of market price of the common and its dividends paid from future growth of the company is lacking for the preferred. One big advantage that the preferred provides its issuer is that the preferred gets better equity credit at rating agencies than straight debt, since it is usually perpetual. Also, as pointed out above, certain types of preferred stock qualifies as Tier 1 capital. This allows financial institutions to satisfy regulatory requirements without diluting common shareholders. Said another way, through preferred stock, financial institutions are able to put on leverage while getting Tier 1 equity credit.


Suppose that an investor paid par ($100) today for a typical straight preferred. Such an investment would give a current yield of just over 6%. Now suppose that in a few years 10-year Treasuries were to yield 13+% to maturity, as they did in 1981; these preferreds would yield at least 13%, which would knock their market price down to $46, for a 54% loss. (In all probability, they would yield some 2% more than the Treasuries--or something like 15%, which would take the market price down to $40, for a 60% loss.)


The important difference between straight preferreds and Treasuries (or any investment-grade Federal agency or corporate bond) is that the bonds would move up to par as their maturity date is approached, whereas the straight preferred, having no maturity date, might remain at these $40 levels (or lower) for a very long time.


Advantages of straight preferreds posited by some advisers include higher yields and tax advantages (currently yield some 2% more than 10-year Treasuries, rank ahead of common stock in the case of bankruptcy, dividends are taxable at a maximum 15% rather than at ordinary income rates, as in the case of bond interest).


Canada

Preferred shares represent a significant portion of Canadian capital markets, with over CAD 5-billion in new preferred shares issued in 2005[2].


Canadian issuers

Many issuers are financial organizations that may count capital raised in the preferred share market as Tier 1 capital, provided that the shares issued are perpetual. Another class of issuer are "split share corporations". Tier 1 capital is the core measure of a banks financial strength from a regulators point of view. ...


Canadian investors

Investors in Canadian preferred shares are generally those who wish to hold fixed-income investments in a taxable portfolio. Preferential tax treatment of dividend income, as opposed to interest income, may in many cases result in a greater after-tax return than might be achieved with bonds. For alternative meanings, see bond (a disambiguation page). ...


United Kingdom

United Kingdom issuers

Perpetual non-cumulative preference shares may be included as Tier 1 capital. Perpetual cumulative preferred shares are Upper Tier 2 capital. Dated preferred shares (normally having an original maturity of at least five years) may be included in Lower Tier 2 capital.[5] Tier 1 capital is the core measure of a banks financial strength from a regulators point of view. ... Tier 2 capital is a measure of a banks financial strength with regard to the second most reliable form of financial capital, from a regulators point of view. ... Tier 2 capital is a measure of a banks financial strength with regard to the second most reliable form of financial capital, from a regulators point of view. ...


United States

In the United States issuance of publicly listed preferred stock is generally limited to financial institutions, REITs and public utilities. Because in the US dividends on preferred stock are not tax deductible (like interest expense), the effective cost of capital raised by preferred stock is 35% greater than issuing the equivalent amount of debt at the same interest rate. This has led to the development of TRuPS (Trust-preferred security) which are essentially debt instruments with the same properties as preferred stock. A Real Estate Investment Trust or REIT (rhymes with meet) is a specialized form of investment company in the United States that effectively allows its (usually public) investors to share the ownership of a group of real estate properties. ... A Trust preferred security is a security possessing characteristics of both equity and debt issues. ...


However, with a dividend tax of 15% and a top marginal tax rate of 35%[6], one dollar of dividend income taxed at these rates provides the same after-tax income as approximately $1.30 in interest. Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        A dividend tax is an income tax on dividend payments to... In the tax system and in economics, the marginal tax rate refers to the increase in ones tax obligation as ones taxable income rises: marginal tax rate = Δ(tax obligation)/Δ(taxable income) This can be measured either by looking at the published tax tables (to get the official marginal... For other senses of this word, see interest (disambiguation). ...


The size of the preferred stock market in the United States has been estimated as USD 200-billion, as of August, 2006, compared to USD 16-trillion for equities and USD 5-trillion for bonds[7].


France

By a law that dates from June 2004, France allows the creation of preferred shares.


South Africa

Dividends from Preference shares are not taxable as income in the hands of individuals.


Czech Republic

Preferred stock cannot be more than 50 % of total equity.


Common types

There are various types of preferred stocks that are common to many corporations:

  • Cumulative preferred stock - If the dividend is not paid, it will accumulate for future payment.
  • Non-cumulative preferred stock - Dividend for this type of preferred stock will not accumulate if it is unpaid. Very common in TRuPS and bank preferred stock, since under BIS rules, preferred stock must be non-cumulative if it is to be included in Tier 1 capital.[8]
  • Convertible preferred stock - This type of preferred stock carries the option to convert into a common stock at a prescribed price.
  • Exchangeable preferred stock - This type of preferred stock carries the option to be exchanged for some other security upon certain conditions.
  • Participating preferred stock - This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions.
  • Perpetual preferred stock - This type of preferred stock has no fixed date on which invested capital will be returned to the shareholder, although there will always be redemption privileges held by the corporation. Most preferred stock is issued without a set redemption date.
  • Puttable preferred stock - These issues have a "put" privilege whereby the holder may, upon certain conditions, force the issuer to redeem shares.

BIS Headquarters in Basel The Bank for International Settlements (or BIS) is an international organization of central banks which exists to foster cooperation among central banks and other agencies in pursuit of monetary and financial stability. It carries out its work through subcommittees, the secretariats it hosts, and through its... Tier 1 capital is the core measure of a banks financial strength from a regulators point of view. ... Participating preferred stock is capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. ... A put option (sometimes simply called a put) is a financial contract between two parties, the buyer and the writer of the option. ...

Notes

  1. ^ This Google search contains examples of voting preferred stock.
  2. ^ "Preferred Stock...generally carries no voting rights unless scheduled dividends have been omitted." [1]
  3. ^ Harvard Business Services, Inc. Accessed February 23, 2007
  4. ^ According to a Quantum Online table
  5. ^ FSA Handbook, PRU 2.2 Capital resources Accessed July 31, 2006
  6. ^ CCH Incorporated Marginal and Effective Tax Rates Accessed September 18, 2006
  7. ^ Standard & Poor's [http://www2.standardandpoors.com/spf/pdf/index/PreferredStock_whitepaper.pdf A Short Guide to Preferred Stocks and the S&P U.S. Preferred Stock Index] Accessed September 18, 2006
  8. ^ Basel Committee on Banking Supervision [Minimum Capital Requirements http://www.bis.org/publ/bcbs128b.pdf] Accessed 2007-1-12

External links

Screenshot of About. ... A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... For other uses, see Stock (disambiguation). ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ... Outstanding stock is common stock that has been authorized and issued by a corporation and purchased by investors. ... A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market (open market including insiders holdings). ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... A Floor Trader checking market prices A Floor Trader is a member of a stock or commodities exchange who trades on the floor of that exchange for his or her own account. ... A Floor Broker is a member of an exchange who is an employee of a member firm and executes orders, as agent, on the floor of the exchange for clients. ... This is a list of stock exchanges. ... There are several methods used to value companies and their stocks. ... Gordon growth model is a variant of the discounted dividend model, a method for valuing a stock or business. ... The dividend yield on a company stock is the companys annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. ... Income per share is the bottom line net income divided by the number of shares outstanding. ... The book value of an asset or group of assets is sometimes the price at which they were originally acquired (historic cost), in many cases equal to purchase price. ... Earnings yield is the quotient of earnings per share divided by the share price. ... The Beta coefficient, in terms of finance and investing, is a measure of a stock (or portfolio)’s volatility in relation to the rest of the market. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... In finance, a financial ratio is a ratio of selected values on a enterprises financial statements. ... The price/cash flow ratio (also called price-to-cash flow ratio or P/CF), is a ratio used to compare a companys market value to its cash flow. ... The P/E ratio (price-to-earnings ratio) of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive its share price is. ... The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the companys expected future growth. ... Price-to-sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. ... Price-to-book ratio or P/B ratio, is a ratio used to compare a stocks market value to its book value. ... The debt to equity ratio (D/E) is a financial ratio indicating the relative proportion of equity and debt used to finance a companys assets. ... Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... Return on Equity (ROE, Return on average common equity) measures the rate of return on the ownership interest (shareholders equity) of the common stock owners. ... Arbitrage pricing theory (APT), in Finance, is a general theory of asset pricing, that has become influential in the pricing of shares. ... In finance, the efficient market hypothesis (EMH) asserts that financial markets are informationally efficient, or that prices on traded assets, e. ... Fundamental analysis of a business involves analyzing its income statement, financial statements and health, its management and competitive advantages, and its competitors and markets. ... Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. ... It has been suggested that ex-dividend date be merged into this article or section. ... Stock split refers to a corporate action that increases the number of shares in a public company. ... Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). ... Invest redirects here. ... Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ... A Trade involves the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ... Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions will usually (not necessarily always) be closed before the market close of the trading day. ... A stock trader or a stock investor is an individual or firm who buys and sells stocks or bonds (and possibly other financial assets) in the financial markets. ... Wikipedia does not yet have an article with this exact name. ...

  Results from FactBites:
 
Stock (business) - MSN Encarta (872 words)
Preferred stock shareholders are usually entitled to receive a fixed dividend before any payments are made to common stockholders.
Stock with first preference in the distribution of dividends or assets is called first preferred or, sometimes, preferred A; the next is called second preferred or preferred B, and so on.
Although holders of preferred stock may have to forego a dividend during a period of little or no profit, this is not true for two types of preferred stock.
  More results at FactBites »

 
 

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