A preferred stock is a class of stock that is granted certain rights that differ from common stock. Namely, preferred stock often possess higher dividend payments, and a higher claim to assets in the event of liquidation. In addition, preferred stock have a callable feature, which means that the issuer has the right to redeem the shares at a predetermined price and date as indicated in the prospectus. In many ways, preferred stock shares similar characteristics to bonds, and because of this are sometimes referred to as hybrid securities.
While preferred stock and common stock are both equity instruments, they share important distinctions. First, preferred receive a fixed dividend as dividend obligations to preferred shareholders must be satisfied first. Common stockholders on the other hand, may not always receive a dividend. Secondly, preferred typically do not share in the price appreciation (or depreciation) to the same degree as common stock. Lastly, preferred typically have no voting rights, whereas common stockholders do.
Consider a company is issuing a 8% preferred stock at a P1,000 par value. In turn, the investor would receive a P80 annual dividend, or P20.00 quarterly. Typically, this preferred stock will trade around its par value, behaving more similarly to a bond. Investors who are looking to generate income may choose to invest in this security.
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