Friday, April 17, 2009


preferred stock Between bonds and common stocks are so-called "preferred stocks." These pay at most a stated dividend--say, a stipulated 5 per cent of the face value per share-no matter how profitable the business becomes.The preferred stockholder is more likely to get his dividend even when profit is low than is the common stockholder,because legally he stands next in line after the bondholder and before the common stockholder.The latter gets no dividends if the preferred stock fails to receive its full dividend.
Often"cumulative"preferred stock is issued.This means that,if for four years of hard times there has not been enough in the way of earnings to pay any of the 5 per cent dividends on the preferred stock,when good times come back again the "cumulated"$20(=4×$5)of unpaid preferred stock dividends must be made good before the common stockholders can begin to receive any dividends.
Often,too,preferred stock is "callable" and "convertible." The first term means that at some previously stated value,say $103 per share,the company can buy back its outstanding preferred stock.The second term refers to the right given the preferred stockholder of converting each share into shares of common stock at some stipulated ratio.

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