What Priority Do Preferred Stockholders Have Over Common Stockholders?

Dividend Guarantee

At regular intervals, corporations distribute a certain amount of profit to their stockholders. These profit distributions are called dividends. The value of such dividends depends on company success; when a company is not profitable, or when it is only marginally profitable, common stockholders usually do not receive a dividend at all. Some companies prefer to invest all of their profits into growth, leaving nothing to distribute as common stock dividends. Holders of preferred stock, however, are guaranteed a fixed dividend amount, regardless of company performance.

Liquidation is the act of converting all of the assets of a particular entity into cash. With corporations, this often happens as a result of bankruptcy. When it happens, the corporation has an obligation to pay off its financial liabilities in a particular order of importance. The first people to receive a payout from corporate liquidation are bond holders and creditors. After that, preferred stockholders receive a certain percentage of the remaining cash. Common stockholders then divide up whatever cash remains, if anything.

Various types of preferred stock exist, each type with its own specific benefits and characteristics. One type of preferred stock is called preferred stock. When an investor owns this type of preferred stock and sells it back to the company, he maintains the right to purchase it again at a specified price in the future.

Despite the priority status they receive, preferred stockholders do face certain disadvantages when compared to common stockholders. For instance, they may not vote on corporate matters as common stockholders do, and if the company experiences explosive growth, their set dividend rates keep them from profiting from it. They also tend to face limitations regarding how and when they may sell their stock. While common stockholders do not have the option of converting their common stock into preferred stock, holders of convertible preferred stock may convert their preferred stock into common stock when it becomes more profitable to do so.