What Is Preferred Stock

This lesson covers the concept of preferred shares as a type of investment that falls between stocks and bonds in terms of risk. While preferred shares are less risky than common shares, they are riskier than bonds. Preferred shares pay out a dividend, similar to a bond, but offer an ownership stake that only becomes meaningful if the company liquidates. Perpetual preferred shares have no term limit, while others may have term limits. It’s important to read the certificate of designation carefully before investing to understand the specifics of the preferred share.

When considering preferred shares, investors should compare them to bonds and read the certificate of designation to make an informed decision. While preferred shares offer a lower risk investment opportunity than common shares, the ownership stake is only meaningful in the unlikely event of company liquidation. By understanding the specifics of the preferred share, investors can determine whether it’s a suitable investment option and which preferred shares to invest in.