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Preferred stock also represents ownership of a company. They generally do not have voting rights, their dividends tend to be fixed and have a higher payment priority than common shares.
1. Types of preferred stocks
a) Participating preferred stock
b) Non participating stock
Preferred stock can also be issued on an accumulative or non-accumulative basis and can be callable or retractable.
2. Dividends
Dividends are paid at a fixed rate based on company earnings. Preferred share dividends must be paid prior to common share dividends. The company also has the right to omit or defer the payment of the dividend. This provides preferred shares with a lower risk element than common shares. The prospectus published by the company and provided to the purchaser, outlines all the details and rights of each particular share issue.
3. Risks
Holders of preferred shares are exposed to the following risks:
a) Systemic and unsystemic risks.
b) Liquidity risks due to low market activity.
c) Dividend payment risk, though lesser so than for common shares.
People who include stock consisting of the preferred shares of a company will do so when they have the following investment objectives of high liquidity and dividend income.
4. Taxation
Same as common stocks, earnings would be taxed on a capital gains basis and your losses would provide write-offs against gains. Any dividends paid to the investor are taxed on a gross-up basis with an accompanying dividend tax credit.
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