Preferred stocks are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Preference shares fall under four categories: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock.
Cumulative preferred stock includes a provision that requires the company to pay shareholders all dividends, including those that were omitted in the past, before the common shareholders are able to receive their dividend payments. These dividend payments are guaranteed but not always paid out when they are due. Unpaid dividends are assigned the moniker dividends in arrears and must legally go to the current owner of the stock at the time of payment. At times additional compensation is awarded to the holder of this type of preferred stock.