What Are Preferred Stocks?

Preference shares are shares of ownership in a business or other entity that the holder receives a right to purchase for an agreed upon price at a specified date. Preference stock, also called preferred stock, is part of share capital that can have any combination of characteristics not possessed by common stock such as common stocks' benefits of equity and a debt instrument. The value of preference stock, usually referred to as the "premium" is calculated by adding the value of the warrants or option charges the holder is entitled to and the current market price of the listed security. This calculation is important to the determination of the value of the preference stock.

A company may issue preference shares in one of two ways: as preferred stock dividends or as preferred stock as part of another transaction. Dividends paid on preference stock are usually subject to the dividend reinvestment provision of the laws of certain states and are dependent upon state law. A company can issue preference stock as a method of raising additional capital. Usually this will be done through an initial public offering (or IPO) in which the proceeds from the sale of preference stock will be used to fund the start-up of the company.

A company may also use preference stock as a method of selling securities in order to create a secondary market for their stock. This secondary market is known as a "follow-on" offer. The proceeds from the sale of preference shares in this manner are immediately made available to the holders of the preferred stock. These transactions are subject to the restrictions and regulations of the Securities and Exchange Commission. Although there can be a high risk of loss, there is also the potential for a large gain since there is only one set date per year during which the preference stock can be sold.

Preference shares are different from common stock in many ways. Unlike common stock, they are not immediately purchased and held by the purchaser and therefore they do not have the right to redeem their shares. They are also generally not traded on a public exchange and are not traded in any stock exchanges. They are typically issued in preference or Class C counties, which are under the supervision of the state financial institution regulation authority.

Because they are not traded on an exchange and because they can only be acquired with paid up capital, preference shares tend to be more highly priced than most other types of common stock. They can also be more highly priced than other types of corporate securities such as debt securities and preferred stocks of the same companies. One reason for the higher price is that dividends for preference stock are usually exempt from federal and state income taxes. Also, they usually have better liquidity and return potential than most other types of publicly traded securities.

If you are thinking about purchasing preference stock, there are several things you should consider. First, you need to be sure that the company you are considering offers dividends. Dividends are the source of income for the issuing company and their holders. Also, you should make sure that you will be able to purchase a minimum of 100 shares of preferred stock with your initial investment.

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