Types of Preferred Shares

Chapter 6 page 19

If a preferred share, or any security, offers attractive features to investors, the yield on that security tend to be lower. If the feature is an advantage to the issuing firm, then the yield tends to be higher.

Callable preferred: Shares that can be bought back at discretion of the issuing company prior to the redemption date of the issue.

Cumulative preferred: Dividends not paid in one period accumulate and are paid in another period. The common shareholders do not have a right to receive any dividends unless the preferred dividends in arrears are paid to the preferred shareholders. Some referred shares are non-cumulative in that dividends not paid are lost forever.

Convertible preferred: Shares that can be exchanged for common shares of the issuing corporation. The number of common shares to be received by trading in the preferred shares is set before the preferred shares are issued. All convertible preferred shares also have a call or redemption feature.

Participating preferred: Shares that pay a regular fixed dividend but also pay an additional dividend along with the common shares.
- First, the preferred dividend is paid.
- Next, common shareholders receive a particular amount of common dividend, and
- Last, any remaining funds available for a dividend payment are distributed on a share-by-share basis to both common and preferred shareholders.


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