2.3 Preferred Stock Varieties
Preferred stock provides steady dividend income with senior liquidation rights over common stock, but carries interest rate risk similar to bonds.
Key FINRA Exam Takeaways
- Preferred stock pays a fixed dividend (% of $100 par value); price moves inversely with interest rates.
- Cumulative Preferred: Requires all skipped dividends in arrears to be satisfied before common dividends.
- Callable Preferred: Issuer can redeem shares at a stated call price (typically when interest rates fall).
- Convertible Preferred: Can convert into common shares at a fixed conversion price/ratio.
- Participating Preferred: May receive bonus dividends if company earnings exceed targets.
Knowledge Checkpoint • Section 2.3
An investor seeking dividend income wishes to ensure that any unpaid dividends from prior years must be made up before common shareholders receive dividends. Which type of preferred stock should they purchase?