GLOSSARY // Market Structure
Preferred Stock
Preferred stock pays a fixed dividend and ranks ahead of common shares in the capital stack, but it usually carries no voting rights and no claim on the growth of the business. It behaves like a bond wearing equity's clothes: the payout is set at issuance (typically a percentage of a $25 or $100 par value), and the price trades mostly on interest rates and credit quality rather than earnings.
Seniority is the point. If dividends get cut, preferred holders must be paid before common holders see a cent, and cumulative preferreds require all skipped payments to be made up before common dividends resume. In a liquidation, preferreds stand behind bondholders but ahead of common.
Most issues are callable — the company can redeem them at par after a set date — which caps the upside. Banks and REITs are the heaviest issuers, and analysts subtract preferred equity before computing metrics "attributable to common," the same way debt gets separated out.
A bank issues preferred shares at $25 par with a 6% coupon: $1.50 per share annually. If rates rise and the price drops to $20, a new buyer's yield is 1.50 / 20 = 7.5%. The common shareholders' dividend can be cut to zero; the preferred's $1.50 cannot be reduced without triggering the cumulative arrears clause.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.