Preferred Stock

Preferred stock is a class of company ownership that sits between bonds and common stock in terms of risk and payout. Like common stock, it represents a share of ownership in a company, but it behaves more like a bond in that it typically pays a fixed, scheduled dividend and doesn't usually give you a vote at shareholder meetings.

The main appeal is the dividend. Preferred shares usually carry a stated dividend rate (say, 6% of the share's face value), and the company must pay that dividend in full before it's allowed to pay anything to common stockholders. If the company hits a rough patch and can't pay dividends, many preferred shares are "cumulative," meaning unpaid dividends stack up and must be paid later before common holders see a dime.

The order of payout matters most when a company runs into trouble. If a company is liquidated, bondholders and other lenders get paid first, then preferred stockholders, and only then common stockholders — who are last in line and often get nothing. So preferred stock is less risky than common stock but riskier than bonds.

The nuance that trips people up: preferred stock trades on exchanges just like common stock, with its own ticker and price, and its price moves — but it usually moves more like a bond price does, reacting to interest rate changes and the company's credit quality, rather than swinging with the company's growth prospects the way common stock does. It's easy to mistake it for "just another stock" because of how it's quoted, but its economics are closer to fixed income.