Preferred stock

The preferred stock is an action  that gives the holder an extra privilege, usually of an economic nature, with respect to what we commonly know as ordinary shares .

For example, the holder of a preferred stock has a higher hierarchy in the collection of dividends  or in the distribution of the remaining assets in the event of bankruptcy by the company.

As with ordinary shareholders, preferred shares do not expire, but however, unlike ordinary shares, preferred shares do not legitimize their right to vote at ordinary or extraordinary shareholders meetings, nor do they assign some participation in the capital of the company. Likewise, the  profitability  of preferred shares is also not guaranteed, because it is linked to obtaining benefits.

Preferred share types

Generally, the preferred shares issued by companies are the following:

  • Cumulative preferred shares: If the dividend is not paid, it is accumulated for future payments.
  • Non cumulative actions:The dividend does not accumulate if it is not paid. This type of preferred share is the most common issued among banks.
  • Convertible preferred shares:They have the option of becoming a stock at a pre-established price.
  • Interchangeable preferential actions: Youhave the option of being exchanged for another action with another type of security under certain conditions.
  • Preferred monthly income shares: It is a hybrid between a preferred stock and a subordinated debt.
  • Preferred shares participants:Allows the possibility of additional dividends under certain conditions.
  • Perpetual preferential actions:They do not have a return date of the invested capital.

Preferred shares in different countries

It is important to mention that in some countries the issuance of these types of actions is encouraged, since they are considered high quality assets. There are different classes of preferred shares, class A, B, C, convertibles, monthly income, perpetual, non-cumulative, etc. The most important are the ones we have named above.

In the United States, for example, there are two types of preferred shares that are preferred and convertible preferred. In addition, there are tax advantages in the  income tax  for the possession of these.

 

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